Fiscal decentralization and the allocation of public spending of subnational governments

The case of Ecuador

Abstract

This article analyzes the relationship between fiscal decentralization and the growth rate of per capita public spending by subnational governments in Ecuador. An empirical strategy supported in a theoretical model is proposed. Data at provincial level over the period 2001–2015 are used. The estimation results show that financial autonomy is positively correlated with growth rates of per capita public investment and per capita current spending, while mixed and weaker results are found for tax autonomy.When using disaggregated data on provincial and local governments, financial autonomy is positively correlated with the growth rate of per capita public investment of both layers of government. However, for the growth rate of per capita current spending, a positive correlation with financial autonomy is found only for local governments. Moreover, hypothesis testing shows that the correlation between financial autonomy and the growth rate of per capita current spending (public investment) is (not) different across layers of governments. Finally, the empirical evidence shown in this article suggests that there should be plenty of room for Ecuador to go further in the decentralization process.