It is no secret that there is a strong correlation between a country’s level of development and its degree of (fiscal) decentralization. After all, many OECD countries are quite highly devolved, whereas many non-OECD countries are typically less devolved.
What is less clear, however, is whether there fiscal decentralization leads to greater economic growth, or whether the correlation between these two variables is spurious. In addition, it is less clear whether the relationship between fiscal decentralization and economic growth also holds—as a rule—for lower-income countries. Given the importance of these questions, researchers have been exploring the relationship between a country’s degree of fiscal decentralization and the country’s level rate of economic growth for decades.
Recent empirical evidence from a cross-national study, published in the journal Heliyon, offers a robust assessment of fiscal decentralization’s relationship with economic growth across divergent developmental contexts (Sima, Liang, and Qingjie 2023). By analyzing data from 23 African and 23 OECD countries between 2015 and 2019, the authors contribute to a growing body of literature that positions subnational fiscal autonomy as a potential driver of GDP per capita.
Conceptual Framework
Fiscal decentralization entails the devolution of expenditure responsibilities and revenue-generating authority to subnational governments. The theoretical foundation spans several paradigms, including allocative efficiency theory (which posits that localized decision-making better aligns public spending with constituent preferences); public choice theory, (which highlights how interjurisdictional competition can foster innovation and cost-effectiveness) and political economy perspectives (which suggest decentralization may enhance institutional stability and mitigate vertical fiscal imbalances).
The relevance of these frameworks varies across country contexts, particularly given disparities in administrative capacity, intergovernmental coordination, and democratic accountability mechanisms.
Methodological Approach
To control for potential endogeneity in the relationship between decentralization and economic growth, the authors apply a suite of instrumental variable techniques including Two-Stage Least Squares (2SLS), Generalized Method of Moments (GMM), and Limited Information Maximum Likelihood (LIML). Their instrumentation strategy leverages country-specific attributes—such as geographic size, ethnolinguistic fractionalization, and administrative structure—to isolate exogenous variation in fiscal decentralization.
This multi-method approach enhances the credibility of their findings and accounts for both structural and institutional heterogeneity across regions.
Key Findings
Contrary to the expectation that fiscal decentralization’s positive impact might be limited to developed-economy contexts, the study identifies statistically significant positive correlations between both expenditure decentralization and revenue decentralization and per capita GDP in both African and OECD country samples. Notably, the elasticity of decentralization’s impact is marginally higher in African countries—an insight that challenges the notion that fiscal decentralization is primarily beneficial in high-capacity, high-income settings.
This suggests that even in contexts with limited resources and weaker institutions, empowering subnational governments may yield tangible growth dividends. Local governments, when given fiscal autonomy, may better leverage local knowledge to catalyze development, provided that enabling conditions—such as transparency and capacity-building—are present.
Policy Implications
The study underscores the importance of context-sensitive decentralization reforms. While OECD countries may benefit from incremental refinement of mature intergovernmental systems, African countries require targeted investments in subnational administrative capacity, legal frameworks, and accountability structures. Rather than deferring decentralization until institutions are “ready,” the authors argue that reform itself can serve as a catalyst for institutional strengthening.
For development practitioners and policymakers, this points to a strategic imperative: designing fiscal decentralization processes that are adaptive, transparent, and inclusive. Sectoral targeting—for instance, focusing on health or education expenditures—may further enhance the developmental impact of fiscal autonomy.
Conclusion
Sima, Liang, and Qingjie’s comparative analysis expands the analytical boundaries of fiscal federalism by demonstrating decentralization’s developmental potential across varied political and economic landscapes. Their findings advocate for a reassessment of centralized fiscal paradigms, especially in African nations where decentralization has often been approached with caution.
As governments grapple with post-pandemic recovery and long-term development imperatives, fiscal decentralization emerges as a viable—albeit complex—policy lever for inclusive and responsive governance.
Read the full (open access) article:
Sima M, Liang P, Qingjie Z. 2023. The impact of fiscal decentralization on economic growth: A comparative analysis of selected African and OECD countries. Heliyon. DOI: 10.1016/j.heliyon.2023.e19520.
