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Bullion

Keywords

Efficiency gain, Fiscal federalism, Economic growth, Federal Economies, Economic development

Abstract

This paper investigated efficiency gain argument of fiscal federalism and economic growth with evidence from five selected developing federal economies. The curiosity is to ascertain whether the efficiency gain –the fundamental argument why countries adopt fiscal federalism is justified in these economies. The paper uses stochastic frontier model to achieve this objective. The evidence from the selected developing federal economies revealed diverging results. While in Nigeria, Ethiopia and India there is more expenditure decentralization than revenue decentralization suggesting that efficiency gains from fiscal federalism may remain elusive, in Brazil and South Africa there is more revenue decentralization than expenditure decentralization suggesting evidence of efficiency gains from fiscal federalism. The major reason why efficiency gains from fiscal federalism is elusive in Nigeria, Ethiopia and India is because of top – bottom approach to fiscal federalism orchestrated by the delay that money and services witness before reaching the local beneficiaries. Naturally, the gamma parameter ( ) that measures the percentage of the disturbance term due to inefficiency is expected to be low to ensure allocative and technical efficiency of fiscal federalism. However, while the values of ( ) are 0.98 , 0. 92 and 0.65 in Nigeria, Ethiopia and India meaning that about 98%, 92% and 65% of the disturbance terms (μ) are due to allocative and economic inefficiencies in fiscal federalism, in Brazil and South Africa only 0.041 and 0.23 representing 4% and 23% disturbance terms are due to allocative and economic inefficiencies in fiscal federalism. This implies that while allocative and technical inefficiencies in fiscal federalism truncates economic growth in Nigeria, Ethiopia and India, the allocative and technical efficiencies in fiscal federalism promotes economic growth in Brazil and South Africa. On this basis, the paper recommends the need for most developing federal economies to adopt Bottom – Top approach to Fiscal federalism as opposed to Top – Bottom approach. This will ensure that sub national governments are coordinates not subordinates to federal government revenues.

Author Bio

Professor Yacinth E. Ichoku is the Vice Chancellor of the Veritas University, Abuja. Dr. Walter O. Ugwuoke is a staff od Department of Economics, Federal University, Lafia

Publication Title

Bullion

Issue

2

Volume

44

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