Fiscal Decentralization in A Federal Developing Economy: Lessons from Human Development Outcomes

Abstract

This paper investigates how fiscal decentralization influences human development in Pakistan from 1995 to 2022, drawing on three core components of the Human Development Index: life expectancy at birth (health), primary school enrollment (education), and gross national income per capita (prosperity). Using Fully Modified Ordinary Least Squares (FMOLS) and Dynamic Ordinary Least Squares (DOLS) estimation techniques, the study evaluates expenditure decentralization, revenue decentralization, and a composite decentralization measure, alongside factors such as foreign direct investment, financial sector development, trade openness, and public investment in education and health. The results indicate that fiscal decentralization supports improvements in educational outcomes but is linked to declines in economic growth and life expectancy, reflecting uneven policy effects across sectors. These findings suggest that decentralization’s potential for advancing human development in Pakistan depends on effective governance, fair resource distribution, and robust institutional capacity. The study adds to the literature on territorial governance by offering evidence of the differentiated sectoral impacts of decentralization within a federal developing economy.