Effects Of Fiscal Decentralization On Poverty Reduction Outcomes, Income Inequalities And Human Development In Kenya

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.