Fiscal Decentralisation and Economic Growth in Transition Economies

Since the collapse of the communist system, transition economies (TEs) have
witnessed significant growth in fiscal decentralisation (FD). In order to meet the needs
of the new decentralised system and adapt to new political changes such as the EU
accession, these countries started to reform their governance system by devolving
greater power to subnational governments. The ongoing intergovernmental fiscal
relations and territorial reforms during these twenty-eight years of transition have
demonstrated that decentralisation in general, and FD in particular, is an ongoing
process, continually evolving and contributing to democracy, economic efficiency and
ultimately economic development (Bird, 1993; Bird et al., 1995). Given the variation
in FD during transition and the attention it has received especially amongst developed
TEs, this dissertation aims to assess the relationship between FD and economic growth
in the context of the transition process. First, it contributes to the current theoretical
literature by critically reviewing the existing theories on this relationship and
exploring new potential (direct and indirect) channels of transmission from FD to
economic performance. Also, this thesis contributes to the current empirical literature
on FD by providing an empirical investigation of the impact of FD on economic
growth for selected transition economies, taking into account the relevance of
important factors such as the level of analysis (national vs subnational levels), the stage
of economic transition, the geographical location and the size of countries - factors
that have not been sufficiently investigated in previous studies. The previous empirical
studies were unable to provide conclusive evidence concerning the impact of FD on
economic performance. By shedding light on the factors that contribute to the FDeconomic
growth relationship and using statistical methods that are appropriate to the
analysis of this relationship, this thesis provides some explanation for the inconclusive
nature of previous studies. Using data for TEs in Europe and the former Soviet Union,
the empirical results suggest that the economic effects of FD are sensitive to the FD
measures used and, more importantly, to the economic and institutional reforms
implemented in these countries. The thesis shows that while FD may have an
insignificant effect on countries in early stages of transition, it can be employed with
beneficial effects by countries at relatively advanced stages of transition. In this sense,
this thesis confirms the theoretical claim, ignored up to now, that FD is a “normal
good”. Exploring the FD-economic growth relationship on a more homogenous
dataset and at subnational level, this thesis concludes that the economic effect of FD
is more visible at regional level, while being moderated by the country size and other
characteristics of countries involved. The empirical evidence has potentially useful
policy implications for the ongoing decentralisation reforms in transition economies