From Devolution to Development: The Role of Fiscal Management Efficiency in Translating Fiscal Decentralization into County Economic Growth in Kenya

Abstract

Fiscal decentralisation has become an important governance reform for promoting local economic development by transferring fiscal responsibilities, resources, and decision-making authority to subnational governments. However, the developmental benefits of decentralisation depend on the efficiency with which devolved resources are managed. This study examined the relationship between fiscal decentralisation and economic growth in Kenya’s county governments, with fiscal management efficiency as a moderating variable. Specifically, the study assessed the effects of revenue assignment, intergovernmental fiscal transfers, and expenditure autonomy on county economic growth and established whether fiscal management efficiency moderated these relationships. The study adopted a positivist research philosophy and an explanatory longitudinal panel research design. The analysis covered all 47 county governments in Kenya over the period from 2013/2014 to 2022/2023, producing 470 county-year observations. Secondary data were obtained from Gross County Product reports, county budget implementation reports, revenue-sharing reports, and audit reports from the Kenya National Bureau of Statistics (KNBS), Commission on Revenue Allocation (CRA), Controller of Budget, and Office of the Auditor-General. Economic growth was measured using annual changes in Gross County Product, while fiscal decentralisation was operationalised through revenue assignment, intergovernmental fiscal transfers, and expenditure autonomy. Data were analysed using descriptive statistics, Pearson correlation analysis, panel diagnostic tests, random-effects regression, and hierarchical regression analysis. The direct-effects model was statistically significant and explained 50.2% of the overall variation in county economic growth. Revenue assignment had a positive and statistically significant effect on economic growth (β = 0.328, p < 0.001), while expenditure autonomy also had a positive and statistically significant effect (β = 0.220, p < 0.001). However, intergovernmental fiscal transfers had a negative but statistically insignificant effect on economic growth (β = −0.021, p = 0.544). Hierarchical regression analysis showed that fiscal management efficiency significantly moderated the relationship between revenue assignment and economic growth (β = 5.165, p < 0.01, ΔR² = 0.083), intergovernmental fiscal transfers and economic growth (β = 4.215, p < 0.01, ΔR² = 0.114), and expenditure autonomy and economic growth (β = 2.413, p < 0.01, ΔR² = 0.073). The final hierarchical model explained approximately 86.1% of the variation in county economic growth. The study concludes that fiscal decentralisation contributes to county economic growth, but its effectiveness depends strongly on fiscal management efficiency. While revenue assignment and expenditure autonomy directly enhance economic performance, intergovernmental transfers alone do not guarantee growth outcomes unless accompanied by effective financial management systems. The study recommends strengthening county own-source revenue mobilisation, improving budget execution, enhancing procurement and audit compliance, and promoting performance-based fiscal governance to maximise the developmental benefits of Kenya’s devolved system.