Fiscal decentralization and macroeconomics stability nexus: Evidence from the Sub-national governments context of Ethiopia

Figures & data

Table 1. Research Variables

Variables	Operational Definitions	Computed	Expected Sign
Dependent Variable
Macroeconomics Stability (MI)	It is the predictability of domestic economic conditions.	Misery Index (MI) = Inflation rate + Unemployment rate	+/-
Independent Variables
Expenditure decentralization (Exp Dec)	It is the regional government’s expenditure autonomy for their assigned responsibility.	Exp Dec= SNG expenditures/Federal government expenditures	+/-
Fiscal Dependency	It is the SNG’s reliance on federal grants.	Dependency = Federal grant/Total SNG expenditure.	+/-
Revenue Decentralization (Rev Dec)	It is the magnitude of regional government revenue autonomy to cover their expenses from their revenue share and the level of dependency on the federal grants.	Rev Dec= SNG own revenues/Total SNG revenues	+/-
Composite Decentralization (Comp Dec)	It is a combined effect of expenditure and revenue decentralization.	Comp Dec= Rev Dec/1-Exp Dec	+/-
Control Variables
Foreign Direct Investment (FDI)	Foreign direct investment (FDI) is international capital flows linked to companies in which a foreign investor gets a controlling position.	FDI= FDI/GDP	+/-
Population Growth Rate (POPgr)	It is the annual growth rate of the population	POPgr= %change in population/initial year population	+/-
Unemployment Rate (Unemp)		Unemp =Annual %change in total unemployment in SNG	+/-
Welfare	It is the provision of service for social well-being and development.	Welfare= annual SNG social development expenditure per capita	+/-
Public investment (Public inv)	It is a productive investment of SNG.	Public inv= annual SNG Economic development expenditure per capita	+/-
School Enrollment	It is the access of children to primary education.	Enrollment= % of Children that have access to primary education	+/-
Regional Gross Domestic Product Growth Rate (GDP)	It is the annual economic growth rate of SNG.	GDPgr = %change in GDP/Base year RGDP	+/-

Source: Developed by Researcher (2020).

Table 2. Descriptive Statistics

Variable	Obs	Mean	Std. Dev.	Min	Max
MI	140	2.9428	.3968	1.361	3.761
Rev Dec	140	.518	2.184	.066	26.052
Exp Dec	140	3.103	3.422	.003	16.2
Dependency	140	.22	.222	0	1.421
Comp Dec	140	.958	1.112	.037	4.304
FDI	140	1.422	1.456	.109	4.143
POP Gr	140	2.819	.066	2.71	2.89
Unemp	140	7.843	1.316	4.70	11.196
Welfare	140	4.862	1.679	.588	7.968
Public Inv	140	1.036	.023	.997	1.061
Enrollment	140	4.467	.424	3.04	5.201
GDP	140	22.741	1.812	18.653	25.965

Source: Study Panel Data (2005—2018).

Table 3. Summary of Unemployment and Inflation Rate of Each Region

Variable	Obs	Mean	Std.Dev.	Min	Max
Tigray (Region = 1)
Unemp	14	6.928	1.483	4.701	9.085
Inflation	14	11.834	8.597	0	28.924
Afar (Region = 2)
Unemp	14	8.281	1.055	6.532	9.646
Inflation	14	12.761	5.851	2.357	22.560
Amhara (Region = 3)
Unemp	14	7.717	1.440	5.674	11.196
Inflation	14	12.870	7.443	0.724	25.777
Oromia (Region = 4).
Unemp	14	7.129	1.226	5.383	8.954
Inflation	14	12.833	8.482	1.113	28.146
Somalia (Region = 5)
Unemp	14	7.788	0.993	5.796	9.488
Inflation	14	12.885	7.129	6.261	30.630
Benshangul/Gumuz (Region = 6)
Unemp	14	7.441	0.800	6.283	8.644
Inflation	14	3.118	21.125	−45.140	30.408
Southern Nations, Nationalities, and Peoples (SNNP) (Region = 7)
Unemp	14	7.950	1.170	5.965	9.927
Inflation	14	13.222	8.108	3.867	27.833
Gambela (Region = 8)
Unemp	14	7.545	0.839	6.111	8.581
Inflation	14	12.315	10.508	−3.394	35.965
Harari (Region = 9)
Unemp	14	8.329	1.574	5.797	10.622
Inflation	14	12.391	7.344	1.083	29.794
Dire Dawa City Administration (Region = 10)
Unemp	14	9.327	0.943	7.316	10.672
Inflation	14	12.054	6.367	2.953	25.018

Source: Study Panel Data (2005—2018)

Graph 1. The Overall Trends of Misery Index (MI).

Source: Study Panel Data (2005—2018).

Table 4. Unit-root Test

Variable	Levin-Lin-Chu Test
	Level	Unadjusted t value.	Adjusted t value.	P value.
MI	0	−5.6498	−3.2484	0.000***
Rev Dec	0	−6.7768	−3.1627	0.000***
Exp Dec	0	−7.0491	−3.8524	0.000***
Dependency	0	−6.7768	−3.1627	0.000***
Comp Dec	0	−4.6285	−1.7234	.0.042**
FDI	0	−15.7518	−12.5139	0.000***
POP Gr	0	−6.1735	−2.6206	0.004***
Unemp	0	−7.3518	−3.8245	0.000***
Welfare	0	−5.0189	−3.5200	0.000***
Public Inv	0	−6.7318	−5.8066	0.000***
Enrollment	0	−4.3574	−2.6042	0.004***
GDP	0	−16.5183	−10.3301	0.000***

Source: Study Panel Data (2005—2018).

***p < 0.01, ** p < 0.05, * p < 0.1 implies statistically significant at 1%, 5% and 10% level respectively.

Table 5. Effect of Revenue Decentralization on Macroeconomics Stability

MI	Coef.	St. Err.	t value	p-value
Lag of MI	−.846	.354	−2.39	.017**
Rev Dec	−.505	.278	−1.82	.069*
FDI	.486	.207	2.35	.019**
POP Gr	5.605	1.934	2.90	.004***
Unemp	7.581	2.474	3.06	.002***
Welfare	.195	.064	3.06	.002***
Public Inv	.039	.023	1.68	.094*
Enrollment	−7.49	2.724	−2.75	.006***
GDP	−.075	.039	−1.92	.055*
Constant	6.502	3.357	1.94	.053
Number of observations 109
		AR (2) test	Z=−.64683	0.5177
Sargan Test of Overid. Restrictions		Chi2 (19)	5.10e-16 .999
Model test		Wald chi2(9)	27.35***	.001

Source: Study Panel Data (2005—2018).

***p < 0.01, ** p < 0.05, * p < 0.1 implies statistically significant at 1%, 5% and 10% level respectively.

As presented in Table 5, lags of MI (P= 0.017; β = −0.846), revenue decentralization (P= 0.069*; β = −0.505), Enrolment (P= 0.006; β = −7.49) and GDP (P=0.055; β = 0.075) have significant negative effect on macroeconomic stability. It indicates that an increase in these variables reduces macroeconomic instability. On the other hand, FDI (P=0.019; β = 0.486), POPgr (P=0.004; β = 5.605), Unemp rate (P=0.002; β = 7.581), and Welfare (P=0.002; β = 0.195), and Public inv (P=0.094; β = 0.039), have a statistically significant positive effect on macroeconomic stability. It implies that an increase in these variables escalates macroeconomic instability.

Table 6. Effect of Fiscal Dependency on Macroeconomics Stability

MI	Coef.	St. Err.	t value	p-value
Lag of MI	−.757	.314	−2.41	.016**
Dependency	.085	.041	2.08	.038**
FDI	.294	.165	1.79	.074*
POP Gr	3.181	1.784	1.78	.075*
Unemp	5.97	2.075	2.88	.004***
Welfare	.143	.05	2.86	.004***
Public Inv	.015	.021	0.72	.474
Enrollment	−5.115	2.144	−2.39	.017**
GDP	.019	.029	0.65	.513
Constant	3.843	2.391	1.61	.108
Number of observations 109
		AR (2) test	Z=−.58104	0.5612
Sargan Test of Overid. Restrictions		Chi2 (19)	4.43e-18 .998
Model test		Wald chi2(9)	920.34***	.000

Source: Study Panel Data (2005—2018).

As presented in Table 6, the lags of MI (P= 0.016; β = −0.757) and Enrolment (P= 0.017; β = −5.115) negatively affect macroeconomic stability. It indicates that an increase in these variables reduces macroeconomic instability. On the other hand, Dependency (P=0.038; β = 0.85), FDI (P=0.074; β = 0.294), POPgr (P=0.075; β = 3.181), Unemp rate (P=0.004; β = 5.97) and Welfare (P=0.004; β = 0.143) have a statistically significant positive effect on macroeconomic stability. It implies that an increase in these variables escalates macroeconomic instability. However, Public inv and GDP have no significant effect on macroeconomic stability.

Table 7. Effect of Expenditure Decentralization on Macroeconomics Stability

MI	Coef.	St. Err.	t value	p-value
Lag of MI	−1.091	.447	−2.44	.015**
Exp Dec	2.392	1.22	1.96	.05**
FDI	.773	.308	2.51	.012**
POP Gr	9.88	3.628	2.72	.006***
Unemp	13.75	4.741	2.90	.004***
Welfare	.31	.1	3.10	.002***
Public Inv	.039	.022	1.72	.085*
Enrollment	−12.74	4.806	−2.65	.008***
GDP	−.166	.095	−1.75	.08*
Constant	−2.449	1.791	−1.37	.171
Number of observations 109
		AR (2) test	Z=−.27875	.7804
Sargan Test of Overid. Restrictions		Chi2 (19)	2.07e-16 .999
Model test		Wald chi2(9)	191.79***	.000

Source: Study Panel Data (2005—2018)

As presented in Table 7, lags of MI (P= 0.015; β = −1.091), Enrolment (P= 0.008; β = −12.74), and GDP (P=0.08; β = −0.166) have a significant adverse effect on macroeconomic stability. It indicates that an increase in these variables reduces macroeconomic instability. On the other hand, Exp Dec (P=0.05; β = 2.392), FDI (P=0.012; β = 0.773), POPgr (P=0.006; β = 9.88), Unemp rate (P=0.004; β = 13.75) and Welfare (P=0.002; β = 0.31), and Public inv (P=0.085; β = 0.039) have a statistically significant positive effect on macroeconomic stability. It implies that an increase in these variables escalates macroeconomic instability.

Table 8. Effect of Composite Decentralization on Macroeconomics Stability

MI	Coef.	St. Err.	t value	p-value
Lag of MI	−1.065	.426	−2.50	.012**
Comp Dec	−.702	.339	−2.07	.038**
FDI	.194	.156	1.24	.214
POP Gr	3.21	1.803	1.78	.075*
Unemp	5.28	2.001	2.64	.008***
Welfare	.153	.05	3.04	.002***
Public Inv	.057	.028	2.03	.042**
Enrollment	−4.24	2.037	−2.08	.037**
GDP	.006	.026	0.22	.828
Constant	3.66	2.226	1.64	.10
		AR (2) test	Z=−1.0535	0.2921
Sargan Test of Overid. Restrictions		Chi2 (19)	4.74e-18 .997
Model test		Wald chi2(9)	611.57***	.000

Source: Study Panel Data (2005—2018)

As presented in Table 8, lags of MI (P= 0.012; β = −1.065), composite decentralization (P= 0.038; β = −0.702), and Enrolment (P= 0.037; β = −4.49) has a significant negative effect on macroeconomic stability. It indicates that an increase in these variables reduces macroeconomic instability. On the other hand, FDI (P=0.019; β = 0.486), POPgr (P=0.004; β = 5.605), Unemp rate (P=0.008; β = 5.28), and Welfare (P=0.002; β = 0.153), and Public inv (P=0.042; β = 0.057) have a statistically significant positive effect on macroeconomic stability. It implies that an increase in these variables escalates macroeconomic instability.

Table A1. Test of Normality

Variable	Obs	Pr(Skewness)	Pr(Kurtosis)	adj_chi2(2)	Prob>chi2
MI	140	0.000	0.000	25.960	0.000
Rev Dec	140	0.000	0.000	.	0.000
Exp Dec	140	0.000	0.075	23.050	0.000
Dependency	140	0.000	0.000	58.570	0.000
Comp Dec	140	0.000	0.289	20.350	0.000
FDI	140	0.000	0.000	22.300	0.000
POP Gr	140	0.067	.	.	.
Unemp	140	0.001	0.001	16.850	0.000
Welfare	140	0.000	0.000	48.610	0.000
Public Inv	140	0.060	.	.	.
Enrollment	120	0.000	0.000	38.020	0.000
RGDP	140	0.000	0.000	52.190	0.000

Source: Study Panel Data (2005—2018).

Table A2. Test of Multicollinearity

Matrix of correlations
Variables	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)	(11)	(12)
(1) MI	1.000
(2) Rev Dec	−0.260	1.000
(3) Exp Dec	0.015	−0.081	1.000
(4)Dependency	0.181	−0.391	0.858	1.000
(5) Comp Dec	0.412	−0.238	−0.194	−0.146	1.000
(6) FDI	0.595	0.353	−0.080	−0.261	0.096	1.000
(7) POP Gr	0.551	−0.400	0.051	0.251	−0.091	−0.876	1.000
(8) Unemp	0.552	−0.441	0.103	0.255	−0.104	−0.640	0.676	1.000
(9) Welfare	0.250	0.000	−0.026	−0.088	0.426	0.540	−0.531	−0.523	1.000
(10) Public Inv	0.121	−0.053	0.553	0.429	−0.268	0.189	−0.201	−0.252	0.496	1.000
(11)Enrollment	−0.124	0.200	0.240	0.223	0.255	0.189	−0.187	−0.228	0.128	0.014	1.000
(12) GDP	−0.205	0.048	−0.516	−0.460	0.772	0.409	−0.387	−0.419	0.517	−0.367	0.121	1.000

Source: Study Panel Data (2005—2018).

Graph A1. Unemployment and Inflation Rate of each SNG (Region).

Source: Study Panel Data (2005—2018)

Graph A2. Misery Index (MI) of each SNG (Region).

Source: Study Panel Data (2005—2018)