Fiscal decentralization and economic growth : the case of two European countries

Abstract

Although it is theoretically expected that fiscal decentralization leads to economic growth, there is a mixed picture of the decentralization effect on economic growth across earlier empirical studies. This thesis tested this relationship using the Granger causality test in order to evaluate whether this relationship is unidirectional, bidirectional or whether there is no relationship between the two. Taking the case of Germany and Spain, two European decentralized countries adopting devolution, the thesis found that fiscal decentralization did not cause economic growth, but rather economic growth caused fiscal decentralization. Thus, this thesis opens up the discussion on the ability and the will of more developed economies to call for fiscal decentralization, stressing on the importance of implementation and sequencing in securing its success.