Decentralisation, economic activity and educational outcomes

Fiscal federalism frameworks often reflect fundamental societal choices and history. They are not primarily geared towards achieving economic policy objectives. Yet, like most institutional arrangements, fiscal relations affect the behaviour of firms, households and governments and thereby economic activity. This chapter provides insights on how decentralisation affects output, productivity, public investment and the performance of education systems. Decentralisation, as measured by revenue or spending shares, is positively associated with GDP per capita levels, although the economic effect is relatively small. Revenue decentralisation has a more pronounced impact than spending decentralisation. Moreover, investment in physical and human capital is higher in more decentralised countries. Finally, decentralisation is positively associated with educational performance as measured by the programme of international student assessment (PISA). While educational policies and functions can be delegated either to sub-central governments or to schools, the results suggest that both strategies are equally beneficial for achieving high-quality primary and secondary education.