Fiscal federalism in Western European and selected other countries: centralization or decentralization? What is better for economic growth?

Following a brief review of the theoretical literature on the benefits and shortcomings of fiscal decentralization this paper presents an empirical analysis of the relationship between per capita economic growth and its production function determinants, on the one hand, and constructed indicators of fiscal decentralization, on the other hand. The analysis suggests for high income countries, in particular Western European countries, a hump-shaped relation between per capita economic growth and capital formation, on the one hand, and fiscal decentralization, on the other hand. By contrast, for countries with middle income, the association between fiscal decentralization and economic growth and its determinants (capital formation and total factor productivity growth) becomes stronger as fiscal decentralization increases.