The Optimal Point for Fiscal Decentralization

Abstract

The paper’s purpose is to shed more light on the impact of fiscal decentralization on the economy and determine whether or not a tipping point can be identified as an optimal point of fiscal decentralization. To do so, we proposed a new theoretical model to link two measurements of fiscal decentralization such as fiscal autonomy and fiscal importance to provincial GDP, and then apply our model with panel data to provincial GDP of Vietnam over ten years and across 56 provinces to test the significance of the impact of fiscal decentralization on the economy and compute the optimal point of fiscal decentralization. Generalized linear model with maximum likelihood method was applied to estimate coefficients in the analytical model. The results of empirical analysis indicated that our model is statistically significant and there exists an optimal point for fiscal decentralization with value captured is 7.33 of fiscal autonomy index and 0.25 of fiscal importance index. Additionally, the study also investigated that the fiscal decentralization would become a positively influential element on the economy, if the degree of fiscal decentralization underlies the optimal point. If the degree of fiscal decentralization exceeds the optimal point, however, it would affect  negatively on the economy.

Keyword: Fiscal decentralization, Optimal point, Provincial GDP