Sustainable Development–Fiscal Federalism Nexus: A “Beyond GDP” Approach

Abstract

The hypothetical allocative efficiency of fiscal federalism and its potential welfare impact have fueled the increased fiscal authority of subnational governments experienced in most countries around the world. This research sheds light on important aspects of developmental outcome of fiscal federalism which hitherto either have not been explored or have been obscured by the exclusive use of GDP or GDP growth as the empirical measure of welfare and development in previous studies. The National Sustainable Development Index (NSDI) and its subcomponent indices were computed for 40 selected countries from 2006 to 2018. Using the NSDI as welfare proxy and employing the difference and system generalized method of moments techniques, this study revealed that fiscal federalism has no significant impact on aggregate sustainable development, environmental and natural resource development index, and social development index, but has a positive impact on economic development index. Hence, fiscal federalism discourse among policy decision-makers in most countries seems to have been based on economic development considerations, leaving out other important dimensions of sustainable development. Therefore, in designing a fiscal federalism apparatus, policy decision-makers should consider proper coordination of the three dimensions of sustainable development if the development-enhancing role of fiscal federalism is to be sustainably achieved.