THE NEXUS BETWEEN FISCAL DECENTRALIZATION AND GROSS INVESTMENT: A CASE STUDY OF PAKISTAN

Abstract

Many countries around the globe attempted to decentralize the powers either political or financial to perform more efficiently. Pakistan being in search of growth also attempted to decentralize the financial authorities into lower tiers. Researchers empirically tested the various propositions of fiscal decentralization and this study is an addition in the literature while exploring the fiscal decentralization and gross investment nexus in case of Pakistan. The data period for underlying hypothesis ranged from 1985 to 2015. This study measured fiscal decentralization through fiscal transfers and the other control variables are, inflation and trade openness. The selected model is estimated by employing Autoregressive Distributive Lag Model (ARDL). Fiscal transfers although has positive sign but statistically it is insignificant which suggest that theoretically it attract investment but statistically these impacts are insignificant. Allocation of delegated fund into irrelevant projects and the attitude of political leaders to delegate/devolve the financial powers are the probable reasons for these results. Inflation discourage investment in this study sample period and trade openness attract investment. In light of the findings of this study it is suggested that the government may allocate the fund properly, control inflation and open the borders for trade to attract investment in Pakistan.