Fiscal Decentralization, Spatial Spillovers, and Regional Growth in Ethiopia

Abstract

This study investigates the effectiveness of fiscal decentralization in promoting regional economic growth in Ethiopia, a context significant for its distinctive federal structure and ongoing policy reforms. Employing spatial econometric techniques, I analyze panel data from 14 regions over the period 2014 to 2021 to assess how decentralized fiscal policies influence economic performance both within and across regions. The findings indicate that, despite Ethiopia’s efforts at decentralizing fiscal authority, regional fiscal autonomy remains constrained by substantial vertical imbalances. Moreover, the study observes that decentralization has negligible direct effects on economic growth within regions and fails to generate significant spatial spillovers across regions. This suggests that the current intergovernmental fiscal arrangements do not support the intended local economic development and regional interdependence. The study underscores the need for re-evaluating the decentralization strategies in Ethiopia and similar emerging economies to enhance their impact on regional growth. By

highlighting these dynamics, this research contributes methodologically and substantively to the literature on fiscal decentralization’s role in economic development.

Keywords— Fiscal decentralization, Economic growth, Spatial econometrics, Spillover and feed-back effects, Revenue, Expenditure

DOI: 10.7176/PPAR/14-3-02

Publication date: September 30^th 2024