The nexus between revenue decentralization reforms and economic growth

Revenue decentralization represents a framework that facilitates enhanced fiscal autonomy for subnational governments, thereby enabling the tailoring of services to meet local needs and potentially fostering economic growth. In Kenya, the ratification of the 2010 constitutional formalized novel revenue frameworks aimed at supporting the operations, management, and sustainability of devolved county governments. However, there remains a paucity of empirical analysis examining the relationship between the revenue decentralization reforms and county-level economic growth. We begin by identifying the main sources of county revenues within the decentralization frameworks, then investigate the dynamic interrelation with county economic growth. Through panel vector autoregression estimation techniques, our analysis reveals a positive and statistically significant association between own-source revenue and conditional grants with county-level economic growth. We discuss the implications of our findings and call for policymakers to reassess the fiscal instruments with the aim of strengthening the roles and responsibilities of counties. Revenue decentralization, in conjunction with fiscal instruments that facilitate the collection of own-source revenue, has the potential to stimulate economic growth at the county level. Conditional grants, while partially significant, demonstrate their capacity to promote economic growth in historically marginalized counties. Our analysis reveals no substantial evidence that the equitable share of revenue significantly contributes to county-level economic growth. This paper highlights the necessity of ongoing restructuring of decentralization frameworks to enhance the autonomy and sustainability of county governments.