Effect of Intergovernmental Transfers on Income and Poverty Rates: Evidence from the Philippines

World Development, Vol. 173 (2024), 106420

Posted: 16 Sep 2022 Last revised: 12 Oct 2023

See all articles by Cheng-Tao Tang

Cheng-Tao Tang

International University of Japan

Chun Yee Wong

International University of Japan

Orelie Delas Alas

affiliation not provided to SSRN

Date Written: August 15, 2023

Abstract

Despite that subnational governments are key actors in the provision of public services, there are concerns about whether providing additional funding to them in developing countries can raise the living standards of local communities. This study investigates the impact of intergovernmental transfers on development outcomes at municipality and city levels in the Philippines from 1994 to 2015. Since the revenue-sharing mechanism between central and local governments in the Philippines follows a pre-determined formula, we leverage this feature and apply the instrumental variable (IV) method for estimation. Our results suggest that the household disposable income per capita increases by 9.6% in the long run due to extra transfers of 1,000 pesos per capita in the Philippine local governments. The poverty rate has also decreased by approximately five percentage points in the long run. The improvement of development outcomes mainly occurs in small and less-developed local governments. Finally, we examine the effect of intergovernmental transfers on local expenditure and taxation; then we discuss how the results of local finance behavior can explain the observed developmental impact.

Keywords: Intergovernmental transfer, income, poverty, instrumental variable, the Philippines

JEL Classification: C26, H71, H72, H75, I32, O15

Suggested Citation

Tang, Cheng-Tao and Wong, Chun Yee and Delas Alas, Orelie, Effect of Intergovernmental Transfers on Income and Poverty Rates: Evidence from the Philippines (August 15, 2023). World Development, Vol. 173 (2024), 106420 , Available at SSRN: https://ssrn.com/abstract=4204103 or http://dx.doi.org/10.2139/ssrn.4204103

Cheng-Tao Tang (Contact Author)

International University of Japan ( email )

777 Kokusai-Cho
Minami Uonuma Shi, Niigata-ken 949-7277
Japan
+81 25-779-1508 (Phone)

Chun Yee Wong

International University of Japan

Yamato-machi
Niigata-ken 949-7277
United States

Orelie Delas Alas

affiliation not provided to SSRN

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