Revenue decentralization represents a framework that facilitates enhanced fiscal autonomy for subnational governments, thereby enabling the tailoring of services to meet local needs and potentially fostering economic growth.
In Kenya, the ratification of the 2010 constitutional formalized novel revenue frameworks aimed at supporting the operations, management, and sustainability of devolved county governments. However, there is a paucity of empirical analysis examining the relationship between the revenue decentralization reforms and county-level economic growth.
A recent study of the nexus between revenue decentralization reforms and economic growth in Kenya begins by identifying the main sources of county revenues within the decentralization frameworks, then investigate the dynamic interrelation with county economic growth. The analysis examines the relationship between revenue decentralization reforms and economic growth of counties in Kenya, for the period spanning from 2013 and 2020. Through panel vector autoregression estimation techniques, the analysis explores the association between own-source revenue and conditional grants with county-level economic growth.
Research findings
The analysis indicates that the collection of own-source revenues and the provision of conditional grants are the main contributing factors in the relationship between revenue decentralization and economic growth. The results in this study underscore the potential of fiscal instruments in encouraging county-level economic growth.
However, further empirical investigations are warranted to complement the findings of this study. For instance, future research could delve into the specific social and economic programs funded at the county level and analyze the extent to which conditional grants impact them. Such an approach would illuminate the significance of conditional grants in improving the social and economic wellbeing of marginalized counties. Additionally, future studies could explore the effects of revenue decentralization using the Human Development Index (HDI) as a metric, thereby examining whether revenue decentralization influences indicators such as health, education, and income.
The analysis of the revenue decentralization variables, particularly concerning the equitable share of revenue, underscores to policymakers that decentralization remains incomplete when the national government withholds necessary resources for devolved county functions. Upon closer examination, many of the observed behaviors and attitudes among elected leaders can be traced back to the historical evolution of decentralization efforts. However, the majority of voters desire for counties to be sufficiently empowered to fulfill the promises of devolution. Therefore, the political incentives for all actors involved in shaping revenue instruments and government restructuring should be driven by the aspiration for independent and sustainable county governments.
Key conclusions and take-aways
- Revenue decentralization, in conjunction with fiscal instruments that facilitate the collection of own-source revenue, has the potential to stimulate economic growth at the county level.
- Conditional grants, while partially significant, demonstrate their capacity to promote economic growth in historically marginalized counties.
- The analysis reveals no substantial evidence that the ‘equitable share of revenue’ (i.e., unconditional grant sharing) significantly contributes to county-level economic growth.
- This paper highlights the necessity of ongoing restructuring of decentralization frameworks to enhance the autonomy and sustainability of county governments.
Read the (open access) article on the site of Public Budgeting and Finance:
Frankline Muthomi and Titus Ndunda. 2024. The nexus between revenue decentralization reforms and economic growth. Public Budgeting and Finance 44(3): 44-60.
