Abstract
The study analyzes the impact of fiscal decentralization on economic growth. The
scope of assessment is broadened by allowing the impact of decentralization on
growth to depend on nation’s quality of governance institutions and macroeconomic
stability. The study uses a panel dataset of 53 countries over the period of 1996-2014.
The empirical findings show that the impact of decentralization on per capita GDP
growth rate is positive when it is supported by stable macroeconomic conditions in
terms of stability in prices, budget deficit and exchange rate. Further, the results show
that fiscal decentralization is growth enhancing when it is complemented by sound
institutional structure in terms of low corruption in government institutions, rule of
law, high bureaucratic quality and democratic accountability. Hence, decentralization
can become growth enhancing if macroeconomic stability and quality of governance
institutions surpass a critical level.
