The Impact of Fiscal Decentralization on Economic Growth in Ethiopia
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Date
2022-06
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Addis Ababa University
Abstract
Ethiopia embarked its journey of fiscal decentralization during the period of the Transitional Government of Ethiopia (TGE) and later, with the adoption of the 1995 Constitution of the Federal Democratic Republic of Ethiopia, fiscal decentralization was formalized. Two and a half decades after the 1995 Constitution, which set the path for fiscal decentralization in Ethiopia, no empirical evidence exists to prove whether fiscal decentralization has boosted economic growth or not. Thus, the main objective of this study is to investigate the impact of fiscal decentralization on economic growth in the Ethiopian context. The study used the Auto Regressive Distributed Lagged (ARDL) model to identify short and long run relationships between economic growth, fiscal decentralization, and chosen macroeconomic variables. The model was estimated using annual data of 25 years for the period ranging between 1996/97 to 2020/21. The model exhibits all of the characteristics of a good regression model. The model passed all serial correlation, normality, Heterosedasticity, and Ramsey RESET tests. The Long-run estimation of the econometric analysis shows statistically significant and positive relationship between GDP per capita and fiscal decentralization in Ethiopian case. Similarly, the short-run ARDL estimate indicates that fiscal decentralization is positively related with GDP per capita and it is statistically significant. The study suggests that government can use fiscal decentralization as one tool to increase economic growth by devolving fiscal responsibilities to lower levels of government, strengthening local level institutions and enhancing competency of lower level officials.
Keywords:
Fiscal Decentralization, Economic Growth, ARDL Model, Fiscal Imbalance, Ethiopia