Public Sector Performance and Economic Misery under Fiscal Decentralization: A Simultaneous Equation Approach

Abstract

The study examines the interdependencies between public sector efficiency, fiscal decentralization and economic misery in Pakistan using a Three-Stage Least Squares (3SLS) estimation framework. The research is driven by the theoretical aspects and relationship between the quality of governance, fiscal structure, and the macroeconomic performance, which means that the Misery Index, public sector efficiency, and fiscal decentralization are endogenous and mutually determined variables. The analysis is based on annual time-series data on Pakistan starting between 1990 and 2024, which reflects long-run structural reforms, decentralization, and macroeconomic fluctuations that the economy undergoes. The empirical evidence is a good substantiation of the fact that the greater level of efficiency in public sector has a strong impact in economic misery and thus the role of effective governance in raising the macroeconomic welfare. Fiscal decentralization is also discovered to have the negative effect on the Misery Index which implies that the devolved fiscal authority leads to the improvement in the allocative efficiency and responsiveness of the local area hence the improvement of economic performance. Further, there is an emphasis on macroeconomic policy position and human capital that can be used to reduce economic hardship. The findings also show that economic growth and political stability are important in increasing the efficiency of the public sector, and fiscal decentralization has a positive impact on the performance of the governance through better accountability and service delivery. Lastly, the determinants of the fiscal decentralization indicates that the economies with stronger institutions, income and trade openness are more likely to be more deeply decentralized. All in all, the results verify the fact that there are good simultaneous association between governance quality and fiscal decentralization and macroeconomic welfare, which highlights the significance of aligned institutional change and fiscal governance towards lessening the economic misery in Pakistan.