Impact of Fiscal Decentralization on Poverty in Pakistan

Abstract

Poverty reduction has captured the attention of different governments and global institution for decades. However fighting the problem of poverty still persists and Pakistan is one of countries that has failed to overcome this problem. Fiscal decentralization considered as one of the possible solutions to alleviate poverty by many policy makers, as it increases efficiency of public services provision. This dissertation examines the effect of fiscal decentralization on poverty reduction by using three measure of fiscal decentralization which are expenditure decentralization, revenue decentralization and composite decentralization. This study used Autoregressive Distributed Lag estimation technique (ARDL) to examine the impact of different measures of fiscal decentralization on poverty reduction in Pakistan for time period 1981-2014.The dissertation analyzed the process of fiscal decentralization and examined the division of revenue and expenditure responsibilities between federal and provincial governments. The empirical results suggests a negative and significant relationship between expenditure decentralization and poverty, whereas for revenue decentralization has negative but insignificant effect on poverty. Composite component which captures the effect of both revenue and expenditure decentralization shows significant and negative relationship with poverty. More significant contribution of expenditure decentralization in reducing the poverty can be achieved if expenditure decentralization is accompanied with sufficient human resource, no over lapping expenditure roles between federal and provincial governments and presence of proper infrastructure. To get a significant contribution of revenue decentralization measure in poverty reduction , the provinces should be given more autonomy in generating their own resources. However, favorable factors like capable human resource, corruption free institutions, should be present for efficient revenue decentralization.