Fiscal Decentralization and the Human Development Index: A Cross-Border Empirical Study

Abstract

Many countries have implemented fiscal decentralization reform in recent decades, which has had a profound impact on their national development. The aim of this paper is to study the relationship between fiscal decentralization and national development. To achieve this goal, we validated our proposition with panel data of 50 countries covering the period of 1991–2020 and used IV estimation to correct any potential endogeneity, with the Geographic Fragmentation Index as an instrumental variable. We used the Human Development Index (HDI) to measure the level of national development, as it is a composite index that includes the three dimensions of economy, education, and health. The results show that there is a significant hump-shaped relationship between fiscal decentralization and the HDI. This result was robust when it was tested on an alternative sample covering the period of 2010–2021. The policy implication determined here is that governments should choose a moderate degree of fiscal decentralization in order to promote national development. We also discuss how to determine such a moderate degree of fiscal decentralization.