Decentralizing for Better Governance: How Fiscal Autonomy Shapes Institutional Quality?

Abstract

This study investigates how fiscal decentralization shapes institutional quality in Pakistan, situating the discussion within the broader framework of fiscal federalism, democratic processes, and regional inequality. Using a secondary time series data from 1996 to 2023 with econometric modeling based on the Autoregressive Distributed Lag (ARDL) approach, the study evaluates institutional quality through indicators such as rule of law, political stability, government effectiveness, accountability, and control of corruption. Findings indicate that fiscal decentralization has the potential to enhance institutional quality, but its success depends on complementary conditions, including human capital development, openness to trade, economic growth, and price stability. Conversely, decentralization that is poorly structured or weakly enforced may aggravate corruption, inefficiency, and deficiencies in service delivery. Policy recommendations emphasize expanding fiscal autonomy, reinforcing accountability mechanisms, and addressing regional disparities to promote inclusive growth and stronger institutions.