Does fiscal decentralization promote economic growth?: An extended Granger-causality test for Korea’s province and city-level panel datasets

Abstract

In this study, we apply an extended Granger causality test to examine whether fiscal decentralization in Korea creates pro-growth effects. Our results show that the pro-growth effects in Korea are significant only at the provincial level. At the city and county level, we instead find partial evidence in support of the reverse causality—economic growth precedes fiscal decentralization. This conflicting result seems to be associated with the gap between provincial and lower level governments in terms of motivation for growth and actual administrative capacity, but this hypothesis is subject to rigorous scientific testing.