Fiscal Descentralization in Eastern Europe: Trends and Selected Issues

Abstract

The article attempts to provide an overview of the fiscal decentralization process in emerging market economies in Eastern Europe in the last 20 years. Using the methodology developed by Vo (2009), the article assesses the degree of fiscal decentralization in the region. Conceptually, the measurement of fiscal decentralization focuses on fiscal autonomy and on the fiscal importance of subnational governments. The empirical analysis reveals that the highest level of fiscal decentralization (centralization) is found in Russia (Armenia) among non-EU members and in Estonia (Slovak Republic) among EU members of the Eastern European countries. In addition, the empirical results show that, in general, the degree of fiscal decentralization is higher in developed OECD countries than in most Eastern European countries (EECs). However, in contrast to our expectations, there has been an alarming downward trend of the fiscal decentralization index (FDI) in most countries of the region over the last two decades. Moreover, the article also examines the effects of fiscal decentralization on growth and public sector size in EECs. The analysis provides some evidence that increases in public sector decentralization are associated with higher income levels. Finally, our results suggest that fiscal decentralization in EECs generally leads to an increase in the size of government, albeit there are some significant differences between EU and non-EU member states.