INVESTIGATING THE RELATIONSHIP AMONG FISCAL DECENTRALIZATION, PUBLIC DEBT AND ECONOMIC GROWTH: A CASE OF SELECTED ASIAN COUNTRIES

Abstract

One of the dangers of fiscal decentralization is excessive borrowing by subnational governments. Fiscal decentralization increases public sector orderliness and leads to economic growth. This study investigates association between fiscal decentralization, public debt and economic extension in a set of panel data of selected Asian countries from 1995-2023. Study employs econometrics approaches: pooled mean group (PMG), mean group (MG), dynamic fixed effects (REM), and also uses fully modified ordinary least square (FMOLS) and dynamic ordinary least square (DOLS) tests for avoiding the endogeneity issue in the data along with Westerlund and padroni Cointegration test for non-stationary panel data analyses. This study found that decentralization of expenditure leads to a reduction in public debt, and decentralization of both expenditure and revenue has mixed effects on economic growth. Additionally, increasing government debt has negative consequences on economic growth in the short and long term, refuting the idea that public debt only has negative effects when it exceeds 90% of GDP. In summary, the study supports the view that public debt hinders economic growth. The policy implications for increasing revenue decentralization in order to meet the economic growth target are highlighted.