Impact of fiscal decentralization on economic growth

JOSEF SHEEHAMA

There is a growing interest in the issue of decentralization of political, administrative, economic and financial dimensions. Its concern has come in the context of the trend which aims to expand the participation of citizens and their role in the process of governance which tries to reduce the role of the state in producing and directing the management. It allows giving the private sector and civil society institutions a greater role in the process of development. The implementation of decentralization in Namibia was introduced in 2000 (Decentralization Enabling Act (Act 33 of 2000).

The main concept of decentralization is to encourage public participation in matters regarding institutional management. Decentralization may contribute to reducing disparities because of greater transparency and by bringing more efficiency and equalization. Fiscal decentralization has become endearing mainly due to the consideration that it will boost the efficiency of public expenditures, and the fact that it is seen as a means of breaking the central government’s grip on the economy by shifting fiscal authority to subnational governments. The process of fiscal decentralization has not been without problems. In many instances municipalities lack capacity both in terms of skills and finances. The optimization of intergovernmental grants from national to municipal governments also serves as a base for many disputes that cause central governments to be extremely sensitive to hard budget constraints and therefore, effective and prudent fiscal control are instituted. There are negative reasons, such as decentralization weakening monitoring, control, and audit by central agencies, thereby creating opportunities for corruption. Fiscal decentralization affects a variety of socioeconomic aspects which include; improving the public sector’s efficiency and governance, achievement of macroeconomic stability and fiscal sustainability.

The link between technology and economic growth can ensure a persistent impact of fiscal system of government on economic growth. Technology is one aspect that contributes a higher percentage to the changes that we experience in the modern-day world. It is necessary that these two aspects be integrated to ensure that the economic growth that comes as an impact of fiscal principle is steady. Considering that, the main objective of fiscal is to enhance economic growth. Although, there are lots of strategies and policies that have been put forward as solutions to poverty, there is a global call for fiscal decentralization. Fiscal decentralization is viewed as one of the plausible solutions for the alleviation of poverty over the years in most countries and also in Namibia. Namibian government is one of the countries that adopted the policy of decentralizing. Basically, fiscal decentralization in Namibia involves the shifting of responsibilities for both revenue raising and expenditure spending to subnational levels of government. In order for the anti-poverty intervention to be a success, it is crucial to firstly identify the poor and their characteristics, what causes or factors that lead to poverty and once the two elements are known, the specific policy can be designed and implemented to improve living standards. The implementation of these policies should however be cost effective, with institutions that complement the policy stance.

Services

Fiscal decentralization enters into poverty alleviation in a number of ways, for instance, the closer the policy implementers are to the target group, the information costs in identifying the poor and the cost of designing successful policies reduces. The specific transfers’ policy ensures that the poor get access to specified services that increase their consumption entitlements and also improve their earning capacity. This policy leads to the provision of services to the poor irrespective of whether they are from rich or poor regions. The types of anti-poverty interventions that fall under this specific-purpose transfer in a multi-level fiscal system are, employment policies targeted to the poor, provision of basic education and health and housing facilities to targeted groups. Poor people are concentrated in poorer regions where they do not have proper access to basic services and infrastructure. Therefore, the growth accelerating strategy is to provide transfers in order to reduce these fiscal disabilities of the poor regions so that they can provide improved levels of public services at comparable tax rates. So, it is crucial to correct these inequities by providing general purpose transfers to fiscal localities that are disadvantaged. The choice is left to the locals whether they provide the required standard of living, but most important is that it improves the poorer regions even though the transfers are not specifically targeted to the poor but they will benefit from the general increase in the region. All in all, general purpose transfers should enable the fiscally disadvantaged sub-national units to provide comparable levels of public services at comparable tax rates. Specific transfers should ensure that specified services, impacting directly on poverty, are provided at the required quantities.

In conclusion, fiscal decentralization responds positively and significantly to real household consumption expenditure per capita. However, major interest is on the role of fiscal decentralization in poverty reduction. It is also possible that the local municipalities are not as effective and efficient as the national government in implementing policies and program that are pro-poor in nature. Further, corruption could also limit the benefits of fiscal decentralization. Based on this the Namibian government needs to reassess its fiscal framework regarding its expenditure strategies to ensure adequate capabilities at the local government level to discharge their expenditure roles in a way that will yield reduction in poverty in Namibia.