Abstract:
The impact of fiscal federalism on economic performance has largely been studied in the developed world since the seminal
work of Oates. In this article, we focus on a particular set of developing countries considered to be federal (Forum of
Federations), to examine how fiscal decentralization has impacted their economic growth. In this context, we study the
impact of tax revenue and expenditure decentralization on economic growth in developing federations. For this purpose,
a panel data of 15 developing federations from 2000 to 2015 are analyzed by using a two-step system Generalized Method
of Moments (GMM) estimation method. The results show that in federal developing countries, both tax revenue and
expenditure decentralization have a significant, positive impact on economic growth. What is more, our findings show that
the impact of fiscal decentralization on economic growth depends upon the level of perceived corruption and on the quality
of the country’s institutions. Thus, empirical evidence depicts that the positive effect of fiscal decentralization on economic
growth is tempered if the country is plagued with corruption, if it has weak institutions, and/or if it suffers from political
instability. By contrast, a relatively corruption-free country featuring healthy institutions and a stable political environment
could take fuller advantage of the effects of fiscal decentralization to improve economic growth.
