This paper aimed to develop a better understanding of political institutions by assessing the direct and indirect impacts of political decentralisation on economic growth. Institutions as the major drivers of economic growth have been studied extensively in the last two decades and within this context, political institutions have been found to significantly influence the so-called economic institutions that are required to attract investment and accelerate economic growth.
The objectives of the study were designed to confirm previous research and determine whether there is a direct relationship between political decentralisation and economic growth or whether there was an indirect relationship mediated through fiscal policy volatility. The study was conducted using a sample of 153 countries that was collected from the World Bank’s databases and regression analysis was used to measure the strength of the association between the variables selected to measure political decentralisation, fiscal policy volatility and economic growth. Since there is no single, universally accepted measure for political decentralisation, senators’ representation of constituencies, local authority over taxation, spending and legislating and the method of appointing municipal government were used as proxies for political decentralisation.
The results were mixed but suggested that there are more benefits than drawbacks to political decentralisation. The results of the study showed that senators’ representation of constituencies and local authority over taxation, spending and legislating helped to reduce fiscal policy volatility and confirmed that lower volatility in fiscal policy was correlated with higher economic growth.