The Consequences of Fiscal Decentralization on Poverty and Income Equality

Many countries around the world are currently pursuing policies for poverty reduction and the improvement of income distribution, and most of them are also implementing fiscal decentralization reforms. Although, separately, fiscal decentralization, poverty, and the distribution of income have been the subjects of extensive theoretical and empirical research, to date we have little understanding of what may be the impact of fiscal decentralization on poverty and inequality. We set out to shed some light on those relationships. We describe the possible channels through which fiscal decentralization might affect poverty and income inequalities and carry out an empirical analysis using panel data for a large number of countries. We find that fiscal decentralization may have significant effects on poverty and inequality. In particular, fiscal decentralization appears to lead to increases in the poverty measures we use, but it also appears to reduce income inequality if the general government represents a significant share of the economy (20% or more).