Fiscal federalism and economic development in Ethiopia: a moderating effect analysis of macroeconomics instability

Figures & data

Figure 1. Proposed conceptual framework. Source: Developed by Researcher Based on Literature (2022).

Table 1. Operationalization of variables.

Variables	Definition		Item	Source
Dependent variable
Economic Development	It is the economic and social well-being of SNGs activities.		The SNG growth rate of real GDP, Human Development Index (HDI) of SNGs, and Clean Water Access	WB; IMF; Bushashe and Bayiley (2023b).
Independent variables
Expenditure decentralization	It is the SNG’s expenditure autonomy for their allotted responsibility.		% Share of Subnational government relative to central government expenditures (Regional Exp Dec), and SNG Expenditure per capita	Bushashe and Bayiley (2023a, 2023b, 2023c); Liu (2017)
Revenue Decentralization	It is the degree to which SNGs depend on federal funds and how much revenue autonomy they have to cover their costs.		Subnational Own revenues as % of total revenues It is also measured through Subnational federal grants as % of total revenues (Dependency)	WB; IMF; Bushashe and Bayiley (2023a, 2023b, 2023c); Liu (2017)
Fiscal Incentive	It links the changes in revenue of SNG with its changes in expenditure and Budget composition motives of SNG officials.		The propensity of % change in revenue need of SNG (R_Propensity), the propensity of % change in expenditure need of SNG (E_Propensity)), and the Budget composition decision of SNG.	Developed by researchers
Mediating variable
Macroeconomic Instability	It is the volatility of the health of the SNG economy.		It is measured by the Misery Index (MI).	WB; IMF
Control variable
Economic Category	Two categories of SNGs in Ethiopia are grounded on economic level deference: Emerging states and Advanced States.		The dichotomies are based on economic level.	Developed by Researchers

Source: Developed by Authors (2022).

Figure 2. Trends in the degree of fiscal decentralization.Source: Authors’ Computation (2023).

Figure 3. Trends of expenditure, own revenue, grants, and tax capacity.Source: Authors’ Computation (2023).

Figure 4. SNGs inflationary trends.Source: Authors’ Computation (2023).

Figure 5. Measurements model.Source: PLS-SEM Outputs, 2023.

Table 2. Inspecting of construct indicators.

	Expenditure decentralization	Revenue decentralization	Fiscal incentive	Economic category	Macroeconomics instability	Economic development	VIF	Q^2 predict	p Values
Exp Dec	0.722***						1.334		0.000
Expenditure per capita	0.960***						1.334
Budget Comp			0.618***				1.236
E_Propensity			0.890***				1.733
R_Propensity			0.878***				1.823
Clean Water						0.748***	1.500	0.304
HDI						0.857***	1.704	0.540
GDP per cap						0.772***	1.264	0.520
Econ_Catag				1.000			1.000
MI					1.000		1.000
Outer weight
Dependency		−0.156***					1.026
Own Rev		0.963***					1.026

Source: PLS-SEM Outputs, 2023.

Table 3. Constructs validity analysis.

Construct	Cronbach’s alpha	Composite reliability (rho_a)	Composite reliability (rho_c)	AVE	R^2	Q^2 predict (LV)
Economic Development	0.707	0.718	0.836	0.630	0.799	0.748
Expenditure Decentralization	0.667	1.070	0.836	0.722
Fiscal Incentive	0.731	0.813	0.844	0.648

Source: PLS-SEM Outputs, 2023.

Table 4. Scrutiny of discriminant validity.

Fornell-Larcker criterion
	Economic category	Economic development	Expenditure decentralization	Fiscal incentive	Macroeconomics instability
Economic Category	1.000
Economic Development	0.145	0,794
Expenditure Decentralization	0.407	0.441	0.850
Fiscal Incentive	0.362	0.646	0.494	0.805
Macroeconomics Instability
Heterotrait-monotrait ratio (HTMT)—Matrix
Economic Category
Economic Development	0.233
Expenditure Decentralization	0.582	0.628
Fiscal Incentive	0.454	0.823		0.679
Macroeconomics Instability	0.051	0.604		0.329	0.225

Source: PLS-SEM Outputs, 2023.

Table 5. Inspecting path coefficients.

Hypotheses	Path ROUTES	β Coff	Effect size	Inner VIF	t-statistics	Sig values	Decision
Direct Effects
H1	Expenditure Decentralization -> Economic Development	−0.207	0.061	3.512	1.908	0.056	Significant
H2	Revenue Decentralization -> Economic Development	0.703	1.018	2.421	9.313	0.000	Significant
H3	Fiscal Incentive -> Economic Development	0.276	0.110	3.449	3.398	0.000	Significant
Moderating variable effects
H4	Macroeconomics Instability × Expenditure Decentralization -> Economic Development	0.100	0.021	4.159	1.218	0.223	Not Significant
H5	Macroeconomics Instability × Revenue Decentralization -> Economic Development	−0.255	0.102	3.200	3.286	0.001	Significant
H6	Macroeconomics Instability × Fiscal Incentive -> Economic Development	0.038	0.002	2.565	0.407	0.684	Not Significant
Control variable
	Economic Category-> Economic Development	−0.241	0.050	1.378	2.476	0.013	Significant

Source: PLS-SEM Outputs, 2023.

Notice: The present study considered a 90% level of significance.

Figure 6. Inner (structural) model of PLS SEM.Source: PLS-SEM Outputs, 2023.

Figure 7. Moderating effect graphical analysis.Source: PLS-SEM Outputs, 2023.

Table A1. Weights of indicators for special subsidies of emerging SNGs.

Indicator	Weight	Afar	Somali	B.-G	Gambela
Area of cultivated land (in hectares)	0.2
Population	0.1
Tropical livestock unit	0.15
Urban unemployment	0.1
Spatial price index	0.15
Tax raising effort	0.2
Number of poor people	0.1
Share among regions	1	18.6	42.48	28.87	10.3

Source: House of Federation, 2009.

Bushashe, M. A., & Bayiley, Y. (2023b). The effect of fiscal decentralization on economic growth in sub-national governments of Ethiopia: A two-step system general methods of moments (GMM) approach. Public and Municipal Finance, 12(2), 32–42. https://doi.org/10.21511/pmf.12(2).2023.03

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Bushashe, M. A., & Bayiley, Y. (2023a). Fiscal decentralization and macroeconomics stability nexus: Evidence from the sub-national governments context of Ethiopia. Cogent Economics & Finance, 11(2). https://doi.org/10.1080/23322039.2023.2244353

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Bushashe, M. A., & Bayiley, Y. (2023c). Fiscal federalism and public service provision in Ethiopia: A mediating role of sub-national governments capacity. Cogent Economics & Finance, 11(2). https://doi.org/10.1080/23322039.2023.2255496

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