Poverty and Fiscal Decentralization. An Empirical Analysis Using Country Panel Data

Background: Poverty remains one of the major international challenges as reflected in the commitments adopted by the United Nations in the 2030 Agenda. In order to fight against it, international development agencies have fostered decentralization reforms that have been applied throughout the world. This means that, the analysis of the effects of fiscal decentralization on poverty has become a research area of extraordinary academic interest, but one that has produced conflicting findings. This paper aims to analyse the effect on poverty of fiscal decentralization of spending in education, health, housing, and social protection. Methods: We estimate a fixed effect model by Feasible Generalized Least Square (FGLS) using unbalanced panel data of countries. Results: The decentralization of spending has a differentiated effect on poverty: the decentralization of health and housing policies contributes to reduce poverty, while the decentralization of social protection spending stimulates an increase in poverty. Conclusions: the hypothesis of the classical theory on decentralization is endorsed in the areas of health and housing. On the other hand, the prediction of the normative theory of the public economy is ratified in the area of the social protection. So, for each country, which social policies to decentralize and the allocation of resources among jurisdictions should be analysed with great detail to avoid problems of targeting strategy, accountability and responsibility assignments.