Fiscal Decentralization and Economic Growth in Thailand: A Cross-Region Analysis

Abstract

Prior to the 1997 decentralization, over 90% of national revenue in Thailand were held at the central government and less than 10% of public expenditure were allocated to local governments across country. Lack of adequate revenue and access to sufficient expenditure budget has caused disparity and ineffectiveness of public services and economic development at the local level. This study examines the effects of the fiscal decentralization on the economic growth in Thailand from 2004 to 2017. The research methodology uses a cross panel data analysis across five provincial regions and considers revenue decentralization, expenditure decentralization, transfer dependency, and vertical fiscal imbalance as influential factors of growth. By applying Panel Fully Modified Least Squares (FMOLS) and Panel Dynamic Least Squares (DOLS) regression approaches, the study finds empirical evidence of positive effects of revenue decentralization, transfer dependency, and vertical fiscal imbalance on regional economic growth across five regions. However, this study also finds that expenditure decentralization has a negative impact on regional economic growth, but level of significance is weak. These findings suggest that the rapid increase in metropolis government expenditure budget following the years of political transition in 2006 and 2014 has caused stagnation in public investment at local level across country, thereby resulted in a lagged behind industrial output and gross provincial product. Lack of budget expenditures also weakens demand and stagnates growth in manufacturing, construction, and real estate activities, thereby rendering fiscal imbalances and development gaps in Thai economy.