Abstract
In this study, we apply an extended Granger causality test to examine whether fiscal decentralization in South Korea creates pro-growth effects. Our results show that the pro-growth effects in South Korea are significant at the provincial level, only from a revenue perspective. This result may suggest that strengthening local taxation power (revenue-centered decentralization) can better serve a local economic development goal than simply loosening use restrictions on inter-governmental transfers (expenditure-biased decentralization). At the city and county levels, however, no such pro-growth effects exist; we instead find partial evidence in support of the reverse causality–economic growth precedes revenue decentralization. This conflicting result seems to be associated with scale economies in public goods provision and the gap in administrative capacity between province- and lower-level local governments.
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Notes
LLC and HT tests are two of the most widely used panel data unit root tests. They test the null (\(\rho = 0\), given \(y_{i,t} = \rho y_{i,t - 1} + {\mathbf{x}}_{i,t}^{{\prime }} {\varvec{\upbeta}}_{i} + \varepsilon_{i,t}\)) under different asymptotic assumptions. The LLC test assumes \(T/N \to 0\), where \(T\) and \(N\) are the panel size and the number of time periods, respectively, and the HT test assumes \(N \to \infty\) while \(T\) is fixed.
As discussed in Sect. 3.2, all equations are estimated using first-differenced variables. First differencing reduces the original time-series dimension by 1, and thus, \(T = 17\).
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Acknowledgements
We would like to thank three anonymous reviewers for their helpful comments on our earlier manuscript. This study was financially supported by the Public Performance Management Research Center in the Graduate School of Public Administration at Seoul National University.
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Park, S., Park, MG. & Nam, KM. Growth effects of fiscal decentralization with weak economic motivation: the case of South Korea. Ann Reg Sci 63, 399–436 (2019). https://doi.org/10.1007/s00168-019-00936-9
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DOI: https://doi.org/10.1007/s00168-019-00936-9