The Impact of Fiscal Decentralization on Economic Growth and Income Distribution in Provinces of Iran

In economic studies, fiscal decentralization theories are used to increase productivity and efficiency of government and to improve the balance between different regions and it is mentioned as one of the fundamental tools in the way of transition to a market economy in developing countries. After Islamic Revolution in Iran and especially after Iran-Iraq war, fiscal and economic decentralization was officially considered as a strategic policy for the development of Iran’s provinces. Firstly, the Provincial Planning Councils were founded and then the provincial revenue-expenditure system was devised to increase the degree of decentralization. But the main concern of economic planners was to investigate the mechanism of which the fiscal decentralization had an impact on economic growth and income distribution. In this paper, by using augmented Solow model, the direct and indirect effects of fiscal decentralization on economic growth is evaluated. After testing for the stationary of our panel of data, it is confirmed that there is a long-run relationship between variables of the model by using Pedroni and Kao tests. After estimating the model by using generalized least squares (GLS) method, it was shown that during the period of 1379-1386, fiscal decentralization (based on two measures of decentralization of national investment expenditures and decentralization of provincial investment expenditures) had a positive effect on economic growth and income distribution in provinces. This effect was in a way that one percent increase in fiscal decentralization would increase economic growth rate up to 0/04 percent. In addition, fiscal decentralization improve income distribution in provinces and indirectly affects economic growth of different regions.