Planning and Budgeting

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In recent years, the economists have been deliberately thinking about the idea of fiscal decentralization, i.e. transfer of decision-making authority from central government to local institutes (in proportion to composition of expenditures and revenues). A good number of researches were conducted to know its effect on economic variables such as economic growth. Great strides were made in Iran to develop fiscal decentralization through establishing provincial revenue-expenditure system, followed by the creation of provincial administrative and financial institutes within the years of 3rd and 4th development plans. This article tries to assess the fiscal decentralization effectiveness on the economic growth in provinces, within the framework of three indicators, namely revenue decentralization, decentralization from national development expenditures, and finally decentralization from development expenditures allocated to provinces. Having gone through the reliability test of variables, and after having approved the long-run relationship between the model variables through the use of Pedroni and Kao C.H. tests, the researchers analyzed the effect of fiscal decentralization on the economic growth of Iranian provinces within 2000-2007 according to extended least square method. The results demonstrated that there is a linear positive relationship between decentralization from credits of national development expenditures, decentralization from credits of development expenditures allocated to provinces and provincial economic growth in a way that 1 percent of fiscal decentralization leads to 0.6 percent of economic growth in the provinces. Yet, there is a non-linear relationship between revenue decentralization and the economic growth in provinces. If revenue decentralization in provinces increases up to 85 percent, economic growth in provinces could rise.

Keywords: Fiscal Decentralization, Economic Growth, Panel Data, Extended Least Square Method

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