Essays on Fiscal Federalism in Ethiopia
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Date
2024-07-02
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AAU
Abstract
The dissertation comprises four essays focusing on empirical studies to uncover whether fiscal
federalism (decentralization) promotes social public service provision, economic growth,
economic development, and macroeconomic stability. Despite the efforts made by the government,
rejoicing in the intended fruits of fiscal federalism has remained in vain and is becoming a prime
policy issue in Ethiopia. Also, prior empirical studies exhibited inconclusive results. It put the
plausibility of the studies into question. First, the study examined fiscal federalism's effect on
public service provision in Ethiopia. The study adopted an explanatory research design.
Considering ten Sub-National Governments (SNGs) from 2005 to 2018, it employed Partial Least
Square Structural Equation Model (PLS-SEM). It also utilized Gaussian copula (GC) estimations
since it helps to deal with potential endogeneity problems. The study showed that expenditure
decentralization significantly fosters public service provision. However, revenue decentralization
showed no significant role in enhancing public service provision. Besides, though expenditure
decentralization has adversely affected SNGs' capacity, revenue decentralization positively
contributes to SNGs' capacity. On the one hand, SNG's capacity plays a significant positive
mediating role in the impact of revenue decentralization on public service provision. On the other
hand, it negatively mediates the contribution of expenditure decentralization on public provision.
secondly, the study examines the impact of fiscal decentralization on Ethiopia’s SNG economic
growth. The study followed a quantitative research procedure employing data from 2008 to 2021.
The units of analysis in the study are SNGs. The study used the two-step System General Method
of Moments (SYS-GMM) of dynamic panel estimation because it resolves concerns such as
endogeneity and heteroscedasticity. The study’s findings revealed that expenditure, revenue, and
composite decentralization showed a significant negative effect on regional economic growth.
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Moreover, among the control variables, inflation and government size revealed a detrimental
effect on regional economic growth. Thirdly, the study aimed to scrutinize the association between
fiscal federalism and economic development in Ethiopia. By employing ten SNGs’ data over the
period 2005–2018, the study used the PLS-SEM. The study found that revenue decentralization
and Fiscal incentives significantly enhance economic development. Nevertheless, expenditure
decentralization significantly deteriorated economic development. Besides, economic instability
has an adverse moderating role on the contribution of revenue decentralization to economic
development. Fourthly, the study aimed to investigate fiscal decentralization's effects on Ethiopia's
SNGs macroeconomic stability. The study followed a causational research design employing data
from 2005 to 2018. The units of analysis in the study are SNGs. The study utilized the two-step
SYS-GMM model. The study findings revealed that revenue and composite decentralization
significantly shielded macroeconomic instability. In contrast, expenditure and fiscal dependency
are significantly aggravated macroeconomic instability. Besides, to grasp the shielding effect of
revenue decentralization from macroeconomic instability, there should be incentive devices to
boost SNG's tax collection efforts. Since capital and welfare expenditures exacerbate
macroeconomic instability, the study urges the government to follow a contractionary fiscal policy
by cutting its expenditures.