Academic journal article The Lahore Journal of Economics

Assessing the Effects of Fiscal Decentralization on the Education Sector: A Cross-Country Analysis

Academic journal article The Lahore Journal of Economics

Assessing the Effects of Fiscal Decentralization on the Education Sector: A Cross-Country Analysis

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. Introduction

The Millennium Development Goals reflect the need for improved education and health, both of which have a vital impact on the quality of life. Better health and education services ensure greater economic opportunities for individuals while the state benefits simultaneously from better-quality human capital. Given market imperfections and the externalities associated with social spending, public sector involvement is considered mandatory for the provision of basic public goods. However, as human needs increase and public sector resources become more scarce, it becomes important to evaluate the effectiveness of social spending. Higher public spending on health and education by itself is not an effective instrument to remedy imbalances. It is necessary to set proper goals, target the right areas and use scarce resources efficiently to increase the effectiveness of public resource use. In developing countries, poorly managed public spending is a key reason for suboptimal outcomes (World Bank, 2003).

In striving for growth and development, human capital is widely acknowledged as the engine of economic growth. To improve human capital, governments must invest in education and health. Policymakers can do this in two possible ways: either invest more money or look to improve policies. When constrained by resources, policymakers aim to optimize the use of scarce resources. Among the competing social sectors, government spending on health and education is by far the most important. Spending on health and education is argued to enhance economic growth, improve human capital, reduce poverty and achieve better income equality (see Romer, 1986; Lucas, 1988; Barro, 1991; Chu et al., 1995; Tanzi & Chu, 1998; Baldacci et al., 2008).

In this context, decentralization is critical, given its potential to influence service provision and resource use. Advocates of decentralization argue that it is based on efficient allocation due to better awareness of local needs and preferences. Decentralization is increasingly relevant to the education sector as the demand for learning rises in economies now based predominantly on knowledge and innovation. This has made education the center of attention for decentralization reforms. With the drive toward greater decentralization, policymakers try to ensure better targeting and greater transparency. Local authorities are, therefore, increasingly entrusted with various decentralized tasks, including provision of education services.

The aim of this study is to estimate the effects of fiscal decentralization1 on different indicators of education. The literature suggests that taking policymaking closer to the public helps identify and execute what people need most. Galiani, Gertler and Schargrodsky (2008) review the literature on the education decentralization and show a positive association between decentralization and education preferences. Faguet (2004) argues that local governments have more accurate information on people's preferences in education, which leads to positive results. Behrman and King (2001) also note a level of harmonization between household decisions and steps taken in a decentralized structure.

In a study on Argentina, Eskeland and Filmer (2007) find a positive association between school autonomy and student performance. Jimenez and Sawada (1999) show that decentralization has led to greater parental participation in schools' decision making in El Salvador. Similarly, Galiani and Schargrodsky (2002) find that decentralization improves overall school performance. In a study using panel data for Swiss cantons, Barankay and Lockwood (2007) show that greater decentralization results in higher educational attainment. Del Granado, Martinez-Vazquez and McNab (2005) find a positive association between fiscal decentralization and education expenditures. Falch and Fischer (2012) conclude that decentralized government spending results in higher test scores. …

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