Impact of Fiscal Decentralization on Non-Oil Economic Growth in a ResourceRich Economy

Fakhri Hasanov,Khatai Aliyev,Ceyhun Mikayilov,Sebuhi Yusifov

doi:10.17015/ejbe.2016.017.06

Abstract

The paper investigates effects of fiscal decentralization on non-oil sector development in case of Azerbaijan for the quarterly period of 2002 through 2013. Results obtained from Autoregressive Distributed Lag Bounds Testing approach show that share of local expenditures and revenues in total, measures of fiscal decentralization, have negative impact on non-oil GDP. This finding is consistent with other studies outcomes and can be considered adequate for the Azerbaijani economy due to the number of institutional constraints. The results of the research would provide a good insight for policy makers in implementing economic reforms to develop institutional aspects of decentralization and thus make it supportive for non-oil economic growth.

Highlights

Decentralization has been a hot topic for many years
In the case of developing countries, decentralization is mostly considered as a deepening process in democracy while in the transitional economies decentralization is seen as the solution in shifting from a command-based economy to a market-based economy
The equation (6) in this case is modified as follow: Where, - Non-oil GDP, - Non-oil Employment, - Capital Stock, – Local Government Revenues, - Local Government Expenditure variables

Summary

Introduction

Decentralization has been a hot topic for many years. Fiscal decentralization means granting governing bodies below central level (states, municipalities) the authority to raise tax revenues and take decisions on spending on their own initiative within a legal framework (Thiessen, 2004).It is believed that fiscal decentralization process will bring significant consequences on resource allocation, public service delivery, equity, and macroeconomic stability (Oates, 1972; Tibout, 1956). Decentralization has been a hot topic for many years. Fiscal decentralization means granting governing bodies below central level (states, municipalities) the authority to raise tax revenues and take decisions on spending on their own initiative within a legal framework (Thiessen, 2004). It is believed that fiscal decentralization process will bring significant consequences on resource allocation, public service delivery, equity, and macroeconomic stability (Oates, 1972; Tibout, 1956). In other words; theoretically, decentralization should have a positive impact on the economic development. There are many reasons explaining the rationale or benefits for decentralization, which significantly vary from country to country. In the case of developing countries, decentralization is mostly considered as a deepening process in democracy while in the transitional economies decentralization is seen as the solution in shifting from a command-based economy to a market-based economy

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Conclusion