AN EMPIRICALANALYSIS OF FISCAL DECENTRALIZATION AND INSTITUTIONAL QUALITY ON GOVERNMENT SIZE: EVIDENCE FROM PAKISTAN ECONOMY

Abstract

Fiscal decentralization and institutional quality play a crucial role in the economy of developing country like Pakistan. The main objective of the study was to investigate the impact of fiscal decentralization and institutional quality on government size of Pakistan economy. The current study considered revenue and expenditure as sub variables for fiscal decentralization while corruption and rule of Law have been considered as sub variables for institutional quality to assess its impact on government size. The nature of the study was quantitative in nature. The data for the independent variables (i.e. revenue decentralization and expenditure decentralization, corruption and rule of law) and dependent variable (government size) of economy of Pakistan was considered were variables of the study. Time series data was collected from year 2012-2022 for the current study. The World Bank, IMF, Pakistan's State Bank, and other reliable sources were used to collet time series data. Data analysis was carried out through Eviews. Based on the Augmented Dickey-Fuller (ADF) test, multiple regression analysis, through ordinary least square method was conducted after the correlation analysis. The result of correlation analysis shows that revenue, expenditure decentralization and rule of law was having a positive relation with size of government while corruption was having a negative relation with size of government. The results of the regression analysis shows that expenditure Decentralization has a significant positive impact of government size while revenue decentralization has a significant positive impact of government size and rule of Law has a significant positive impact on government size, while corruption has a significant negative impact on government size. The study concluded that H1 , H2 and H3 were accepted. The study suggested that efforts should be focused on improving the quality of institutions, especially the rule of law, in order to make governance processes more effective, transparent, and accountable.