Effects of Fiscal Decentralization on Poverty Reduction Outcomes, Income Inequalities and Human Development in Kenya
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Date
2017
Authors
Mwiathi, Peter Silas
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
The Kenya government has instituted fiscal decentralization over the years to
promote social economic development, reduce poverty and income inequality and
ensure balanced regional development. These include: local government system
that was inherited from colonial rule and remained relevant until 2013 when it was
replaced by county government; District Focus for Rural Development 1983;
devolved funds such as Local Authority Transfer Fund 1999; and Constituency
Development Fund 2003. Despite these efforts on decentralization, Kenya has
experienced economic growth below national targets. Poverty levels have
remained high and there has been widening income and regional inequality.
Literature on the relationship between fiscal decentralization and poverty, income
inequality and human development has been rather inconclusive about the effects
of fiscal decentralization on poverty and income inequality. The main objective of
this study was to analyse the effects of fiscal decentralization on poverty reduction
outcomes, income inequality and human development in Kenya. The cross-county
panel data from 2002 – 2014 was used. The published data was from government
agencies, United Nation Development Programme and World Bank. Various
empirical models were estimated to find out the effects of intergovernmental
transfers, county own-source revenue and county expenditure on poverty, income
inequality and human development in Kenya. The study established that the effect
of fiscal decentralization on poverty and human development depends on the
nature of decentralization and the extent of fiscal decentralization.
Intergovernmental transfers and the share of county expenditure were found to
increase poverty at low levels below 18.42 per cent and 0.52 per cent respectively
beyond which they would reduce poverty head count. Own-source revenue was
found to reduce poverty at low levels below 44.47 per cent after which further
increase in own source revenue would increase poverty head count. The study also
established that there are differences in the effects of fiscal decentralization
between marginalized counties and other counties. The effect of fiscal
decentralization is reinforced in the marginalized counties. The difference in the
effect of fiscal decentralization on poverty between marginalized counties and
other counties was estimated as 8 percentage points, 0.2 percentage points and
5.38 percentage points for intergovernmental transfers, own revenue and
expenditure respectively. All fiscal decentralization indicators had no significant
effect on the income inequality in Kenya. Arising from the study findings, it is
important for county governments to have adequate own-source revenue to finance
their expenditure as opposed to relying on intergovernmental transfers from
national government. However, very high level of county own-source revenue may
not necessarily serve the interest of the poor, as evidenced by the non-linear
relationship between county own revenue and poverty in this study.
Description
A Thesis Submitted to the School of Economics in Partial Fulfillment of the Requirements for the Award of the Degree of Doctor of Philosophy in Economics of Kenyatta University, July, 2017