Fiscal Devolution and Corruption in Pakistan: A Non-Linear Analysis

This study analysed the viability of fiscal devolution for controlling state corruption in Pakistan. Specifically, it investigated the role of different types and magnitudes of fiscal decentralisation in controlling corruption after accounting for institutional quality and fiscal reforms. The FMOLS results from 1976–2020 indicated a non-linear relationship between fiscal decentralisation and corruption, implying that decentralisation initially worsened the transparency of state affairs before later improving it. The findings suggested that composite decentralisation should be considered instead of analysing revenue and spending decentralisation separately, and that a minimum of 57% composite decentralisation was necessary for successful corruption control. It was also noted that an institutional structure characterised by low institutional quality and non-transparent fiscal reforms did not substantiate the benefits of fiscal decentralisation for controlling state corruption. The study recommends that fiscal devolution be coordinated with the overall institutional framework of the economy to realise its benefits. JEL Classification: D73, E6