The Role of Institutional Quality in the Link Between Fiscal Decentralization and Regional Economic Development.

Abstract

Incorporating institutional quality to see how fiscal decentralization can drive regional economic development: the case of Turkey The analysis is motivated by the idea that simply transferring expenditure functions and fiscal resources to subnational governments do not in themselves better development outcomes; rather, the success of decentralization depends on accountability, administrative capacity, policy implementation and the budget financing mix at subnational level. The empirical evaluation integrates the International Monetary Fund 2026 regional fiscal data for Argentina, Brazil, Colombia, Mexico and Uruguay with the World Bank 2025 update of the worldwide governance indicators. An explicit descriptive fiscal-autonomy proxy—one minus the share of transfer revenues in total regional revenue. The evidence shows strong heterogeneity: the proxy goes from 10.3 percent in Mexico to 62.3 percent in Uruguay, while government effectiveness in 2024 ranges between −0.22 (Mexico and Brazil) to 0.69 (Uruguay). The findings correspond with the general literature suggesting that decentralization is better for development when subnational governments have revenue autonomy and are embedded in strong institutional arrangements. A causal panel regression is an econometric estimate, but since our five-country comparison is descriptive rather than a causal panel regression, we would classify the findings as comparative evidence relevant to a larger econometric study.