Decentralization and Welfare: Evidence From a Panel of Countries

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This study empirically tested for the relationship between different measures of decentralization and three indicators of welfare—per capita income, poverty incidence, and the human development index. It utilized a panel data of around 60 countries of various income levels for the ten-year period from 2006 to 2015. The study primarily employed the System GMM method, along with some robustness checks. Results suggest that decentralization is associated with higher per capita income; but it has no relationship with poverty nor with HDI. The relationship, however, is not linear—it increases at a decreasing rate until it becomes negative at high levels of decentralization. In addition, revenue decentralization has the strongest relationship with per capita income among the three decentralization measures tested. There is also evidence that good governance strengthens the positive relationship between decentralization and per capita income; and that the decentralization-welfare relationship varies across country income levels.