buy custom Bluetooth Modelling essay

purchase custom Bluetooth Modeling exposition With the presentation of remote correspondence, it has change the whole world; Bluetooth is such innovation which can transmit the two information and voice transmissions at same time. Bluetooth comprises of a little microchip, and the innovation behind it is short-extend connection to trade data between two gadgets, for example, a PC to cell phone or portable to cell phone. At the point when two gadgets having Bluetooth drawn near short separation (10 meters) of one another, those two gadgets will recognize one another and associations will be consequently. Since the innovation was presented, it has disposed of the need of interfacing many wired gadgets; Bluetooth gadgets will associate in a flash regardless of whether the gadget doesn't have an away from of sight, and association separation can be expanded to 100 meters with the employments of a speaker. The use of this new innovation is colossal; when you are in the house PDA (Personal Digital Assistant) synchronizes with your hom e and the front entryway opens, when you approach your vehicle; with a dash of a catch the entryway opens, as you show up close to the gathering of an inn the entryway open itself naturally. Presentation Handheld gadgets are expanding turning out to be a piece of individuals every day lives, and the portable utilization on the planet is expanding exponentially; as of now individuals are utilizing cell phones, palmtop and PCs Dominant part of these gadgets dont have a perfect information correspondence interfaces, or, in the event that they do, their interface will require lumbering associations and setup techniques, when you associate it with another gadget. An answer was made that had the option to dispose of unwieldy interfacing links, and short-run remote connections was utilized to encourage on-request availability among various gadgets. The perfect innovation was Bluetooth since it was reasonable, empowering of convincing applications, and it has been all around received by gadget merchants. In 1998, a gathering of five significant gadgets organizations Nokia, Ericsson, IBM, Intel and Toshiba-made an open system innovation that is utilized all through the world to interface hand held gadgets. Right now practically all the hardware producing organizations on the planet have joined the Bluetooth Special Interest Group (SIG). This new innovation has been named after a tenth century King of Denmark, Blatand Bluetooth who had the option to join his warring Viking clans under a typical guideline in Denmark, while Bluetooth logo depends on Runes encompassing the King dominated. Bluetooth innovation utilizes a radio recurrence (RF) correspondence interface and other related correspondence conventions and use profiles which will be talked about later in this paper. The innovation behind Bluetooth can work in the 2.4 GHz ISM (modern, logical, and clinical) radio recurrence (RF) band, likewise this new innovation can bolster ease, its capacity productive, and it is additionally a solitary chip innovation. Scatternet proposed here depends on a tree structure by assigning a hub head to introduce the convention and produce an incorporated calculation which will dole out the jobs of the system hubs. A tree topology organize results to shape a scatternet and create facilitates gadgets. A gadget called the pioneer will begin the piconet by obtaining all slaves in its range, a limit of seven slaves. An ace and its slaves structure a piconet whose clock is synchronized with the clock of the ace. Slaves and their lord impart through a piconet. During scatternet arrangement, the primary issues that influence it are; the means by which hubs will make revelation, how piconet sizes are adjusted and how bosses and passages are picked. What is a Bluetooth? This is a remote innovation that will permit network between at least two gadgets that are Bluetooth empowered, for instance a cell phone and a PC. This innovation is using a 2.4 GHz radio range and the gadgets must be at a scope of 10 meters or more when a speaker is utilized. Be that as it may, because of varieties among the portable specialist co-ops, not all the Bluetooth innovation will offer the equivalent of usefulness in gadgets. Bluetooth innovation utilizes short-extend interchanges strategy which is planned to supplant link interfacing versatile at same time keep up an elevated levels of security. The benefits of this innovation are that, it devours low force and the expense is likewise low, while its determinations will characterize a uniform structure that will be utilized for a wide scope of gadgets to interface and speak with different gadgets. This new innovation has accomplish a worldwide acknowledgment, this in light of the fact that Bluetooth gadget can associate w ith other Bluetooth empowered gadgets anyplace on the planet, and at same time Bluetooth gadget can impart at same time up to seven other Bluetooth empowered gadgets inside a solitary piconet-specially appointed systems. The quality of this new innovation is its capacity to deal with the two information and voice transmissions at same time, and this has empower individuals to appreciate different advancements that accompany this new innovation, for example, without hands headset for voice calls, cell phone applications printing and fax abilities. History of Bluetooth In 1994, Ericsson organization began building up a gadget that will associate cell phones to different gadgets without a link interface, however in 1998, an uncommon gathering of organizations passing by the name Bluetooth Special Interest Group (SIG) was shaped by five significant versatile assembling organizations: IBM, Intel, Nokia, Toshiba and Ericsson, with the point of advancing across the board business acknowledgment of this new innovation. Inside a half year, Bluetooth Special Interest Group (SIG) began welcoming other media transmission organizations all inclusive, and because of that they started a free access to Bluetooth innovation, at same time these organizations promised to help any new determination of Bluetooth. A long time later, with dollar signs glimmering in their eyes, the remainder of media transmission producing organizations immediately got on board with the fleeting trend, In no time, right around 2,000 Bluetooth adopters to their positions and the number k eeps on developing. The underlying point of Ericsson Company to begin creating Bluetooth was to join PC gadgets and other media transmission gadgets, for example, cell phones without the utilization of a link. Subsequently, the Bluetooth Special Interest Group (SIG) thought it very fitting to name this new innovation after the Danish King Harald Bluetooth Bltand; the Danish lord was given that epithet Bluetooth in light of the fact that he used to cherish eating blueberries and that his teeth were recolored blue because of the propensity for eating blueberries; However, this is unimportant theory. There are some IEEE principles which are found in Bluetooth innovation, however the primary distinction about this new innovation is that determinations or stage which Bluetooth work is for a total framework; from physical layer to application layers found in different gadgets. Bluetooth detail Since its commencement, Bluetooth innovation has kept up a worldwide standard with known details. Bluetooth has proclaimed itself as an all inclusive communicator and the innovation can be utilized in any nation on the planet. Coming up next are the standard details of Bluetooth innovation: Recurrence Range Bluetooth innovation works under the recurrence of 2.4 GHz, all around, this band utilized by this innovation is free and unregulated, aside from in nations, for example, Japan, France and Spain, this data transmission has been diminished, yet these limitations have been wiped out in both Japan and Spain. In France, its military have rights over the 2.4 GHz recurrence band, however the authority over 2.4 GHz band was surrendered in January, 2001. Most nations on the planet are starting to direct 2.4 GHz recurrence band, therefore guaranteeing the band will be accessible for Bluetooth machines. Physical Layer The Bluetooth equipment has been made with a solitary 9*9mm chip, this equipment is found in all the gadgets that are Bluetooth empowered, and can speak with any Bluetooth gadget that is found inside a sweep of ten meters or this separation can be increments to 100 meters just if an intensifier has been utilized. The greatest information rate that can be utilized to transmit information is 1Mbps for first era innovation, and at same time Bluetooth innovation utilizes Gaussian Frequency Shift Keying (GSSK) for radio recurrence regulation. Sooner rather than later, this innovation ought to permit accomplishment of between 2-12 Mbps move rate. Commotion Immunity Bluetooth innovation is intended to work in a loud domain, there are two ground-breaking strategies that has empower this Bluetooth innovation to accomplish this motivation behind working under an uproarious situation. These strategies are as per the following: a. Recurrence Hop (FH) spread range; this is an innovation which partitions the recurrence band into littler channels. The innovation will jump directs and consequently it will limit likely impedance in Bluetooth innovation tasks. Bluetooth gadget in the wake of transmitting parcel of information, the gadget will bounce to another recurrence and this is controlled by the ace. The decency of this innovation will give a low level transmission security that can't be broken; in actuality this procedure will forestall the E0 encryption plot from being split. b.Error control; this strategy will empower Bluetooth recipient not exclusively to identify blunder got, yet it will address the equivalent transmitted mistake. The procedure has the ability of constraining any clamor that is being transmitted over a significant distance joins. There are 3 blunders which have been all around characterized in Bluetooth innovation determinations: 1/3 Rate FEC, 2/3 Rate FEC, and Automatic Repeat Request (ARQ). Despite the fact that this innovation has diminished the quantity of re-transmitted information, FEC has hinder transmissions, and subsequently isn't reasonable to be utilized in a commotion free condition. Yet, bundle headers are exemption for this innovation since it can function admirably paying little heed to natural

Day 3 Hw free essay sample

Developing Markets Spring 2013 Sarath Nonis CASE 3-2 Hong Kong Disneyland 1. What prompted the possible misfortunes experienced by Hong Kong Disneyland in its first year of activity? In what capacity ought to Hong Kong Disneyland correct its market circumstance? Social Adaptation: The Chinese didn't effectively interface with the characters in the recreation center since they were new to the item; they appreciate concentrating on what they can purchase, eat, and bring home, and taking pictures and bringing them back home instead of the experience of being in the spot itself. Chinese Tourist Behavior: Going to Hong Kong implies a shopping experience, so they pick the less expensive one, which is Ocean Park; likewise, the Chinese individuals put a premium on instruction, where Ocean Park gives the instructive inclination. Relationship with Travel Agents: The Hong Kong Disneyland didn't notice a lot of thoughtfulness regarding building a connection transport with the trip specialists while Chinese vacationers rely a great deal upon trip specialists. We will compose a custom article test on Day 3 Hw or on the other hand any comparative point explicitly for you Don't WasteYour Time Recruit WRITER Just 13.90/page In this manner, the most ideal path for Hong Kong Disneyland is to deciding contrasts in the Chinese culture and receiving it; to comprehend Chinese visitor conduct inside and out, at that point to deal with the weights of neighborhood request regarding the need of Chinese customers and vacationers; attempt to give more consideration to building a relationship with the trip specialists. 2. Whatever degree could Hong Kong Disneyland adjust its item to Chinese shoppers without weakening its picture? Put increasingly instructive materials about its picture. Taking photographs with Donald Duck at the Hong Kong Disneyland. Giving products which are associated its picture for traveler to purchase as blessings to bring home. 3. By what method ought to Hong Kong Disneyland address rivalry? Grow the topic of the Hong Kong Disneyland; it ought to think about the way of life and practices of Chinese. For instance, associate the recreation center subject with children’s training. Slice the cost to make individuals think it is worth to pay. It ought to comprehend that trip specialists are the most significant deals divert in the terrain China. It is extremely well known in territory China to give a gathering markdown.

Naturalistic Observation in Psychology

Naturalistic Observation in Psychology Basics Print Naturalistic Observation in Psychology By Kendra Cherry facebook twitter Kendra Cherry, MS, is an author, educational consultant, and speaker focused on helping students learn about psychology. Learn about our editorial policy Kendra Cherry Reviewed by Reviewed by Amy Morin, LCSW on October 01, 2019 facebook twitter instagram Amy Morin, LCSW, is a psychotherapist, author of the bestselling book 13 Things Mentally Strong People Dont Do, and a highly sought-after speaker. Learn about our Wellness Board Amy Morin, LCSW Updated on November 24, 2019 More in Psychology Basics Psychotherapy Student Resources History and Biographies Theories Phobias Emotions Sleep and Dreaming Naturalistic observation is a research method commonly used by psychologists and other social scientists. This technique involves observing subjects in their natural environment. This type of research is often utilized in situations where conducting lab research is unrealistic, cost prohibitive or would unduly affect the subjects behavior. Illustration by Brianna Gilmartin, Verywell How Does Naturalistic Observation Work? In many instances, people might not behave the same way in a lab setting that they might in a more natural environment. For this reason, behaviors sometimes need to be observed as they happen in the wild so to speak. By watching how people respond to certain situations and stimuli in real-life, psychologists can get a better idea of how and why people react.   Naturalistic observation differs from structured observation in that it involves looking at a behavior as it occurs in its natural setting with no attempts at intervention on the part of the researcher.?? For example, researchers interested in looking at certain aspects of classroom behavior, such as interactions between students or even the dynamics between the teacher and students, might opt to use naturalistic observation as part of their research. Performing such research in a lab would be difficult since it would involve recreating a classroom environment, and would likely influence the behavior of the participants, making it difficult to generalize the observations. By observing the subjects in their natural setting (the classroom where they work and learn each and every day), the researchers can get a better look at the behavior of interest as they occur in the real world.?? Advantages and Disadvantages   So what are some of the reasons why psychologists might want to use naturalistic observation as part of their research? One of the biggest advantages of this type of research is that it allows the investigators to directly observe the subject in a natural setting.?? This gives scientists a first-hand look at social behavior and may even allow them to notice things that they might never have encountered in a lab. Such observations can serve as inspiration for further investigations into particular behaviors. The information gleaned from naturalistic observation may also lead to insights that can help people overcome problems and lead to healthier, happier lives. Some other advantages of naturalistic observation: It allows researchers to study things that cannot be manipulated in a lab due to ethical concerns. For example, while it would be unethical to study the effects of imprisonment by actually confining subjects, researchers can gather information by using naturalistic observation in real prison settings.It can help support the external validity of the research. It is one thing to say that the findings of a lab study will generalize to a larger population, but quite another to actually observe those findings occurring in a natural setting.?? While naturalistic observation can be useful in many cases, this method also has some potential downsides that must be considered. One of the disadvantages of naturalistic observation includes the fact that it can be difficult to determine the exact cause of a behavior and the experimenter cannot control for outside variables.?? Some other disadvantages of naturalistic observation: People may behave differently when they know they are being watched. Sometimes people try to behave better than they normally would in order to appear more socially desirable or acceptable. Researchers can make efforts to avoid this, but it can be difficult to eliminate this problem entirely.People may try to behave in a certain way in order to conform to what they think the researchers expect  to see. In psychology, the term demand characteristics refer to subtle cues that let participants know what the experiment is about or what the researchers hope  to find. As a result of these demand characteristics, participants may alter their behavior in order to go along with what they think the researchers want.Different observers may draw different conclusions from the same witnessed behavior. Two researchers might see the same actions yet attribute them to different causes. Data Collection Methods   Researchers may utilize a number of different techniques to collect data from naturalistic observation. This might involve writing down the number of times a certain behavior occurred in a specific period of time or making an actual video-recording of the subjects of interest. Tally Counts:  The observer writes down when and how many times certain behaviors occurred.Observer Narratives:  The observer may take notes during the session and then go back later to try to collect data and discern behavior patterns from these notes.Audio or Video Recordings:  Depending on the type of behavior being observed, the researchers might also decide to make actual audio or videotaped recordings of each observation session.?? How Often Is Data Collected? Because it is rarely practical or even possible to observe  every  moment of a subjects life, researchers often use sampling to gather information through naturalistic observation. The goal is to make sure that this sample of data is representative of the subjects overall behavior. Obtaining a  representative sample  can occur in a few different ways: Time Sampling:  Involves taking samples at different intervals of time, which may be random or systematic.Situation Sampling:  Involves observing behavior in a variety of different situations and settings. Examples Lets imagine that you want to study differences in risk-taking behavior between teenage boys and girls. You might choose to observe behavior in a few different settings, such as on a sledding hill, a rock-climbing wall, an ice-skating rink, and a bumper car ride. After you operationally define risk-taking behavior, you would then observe teens in these settings and record every incidence of what you define as risky behavior. Some famous examples of naturalistic observations include  Charles Darwins  journey aboard the  HMS Beagle??, which served as the basis for his theory of natural selection, and Jane Goodalls work studying the behavior of chimpanzees.

The effect of internal audit reports on audit quality and earnings performance. An empirical Study on the companies listed in London Stock exchange (LCE) Free Essay Example, 1750 words

The Effect Of Internal Audit Reports to Stakeholders On Audit Quality And Earnings Performance. An Empirical Study Of the Companies Listed On London Stock Exchange (LCE). Introduction Internal audit is an independent and objective consulting and assurance activity where the philosophy of adding value to improve the operations of a company is the guiding principle. It helps the company in accomplishing its objective by bringing a systematic and disciplined approach to evaluating and improving the efficiency of the company’s governance, internal control and risk management (IIA 1). The quality of audit plays a vital role in maintaining an efficient market environment. However, an independent quality audit underpins confidence in the credibility and the integrity of financial statements that is essential for well functioning of the markets and enhancement of the financial operations (Faraouk and Hassan 2). The internal audit department provides an objective, reliable and neutral service to the management, board of directors and the audit committee (Ljubisavljević and Jovanovi 124). On contrary, the interest of stakeholders is on return on the investments, sustainable growth, reliable reporting on the financial performance, strong leadership and the business practices of a company (Al-Matari, Al-Swidi & Fadzil 35). Recently the issue of globalization of audit has increased, and the need for ensuring quality of audit functions at different locations is essential. We will write a custom essay sample on The effect of internal audit reports on audit quality a nd earnings performance. An empirical Study on the companies listed in London Stock exchange (LCE) or any topic specifically for you Only $17.96 $11.86/pageorder now Similarly, the growth of investments across borders has increased and thus the importance of evaluating the quality of financial statements attested to by audit firms in other areas (Kleinman et al. , 62) The responsibility of the auditor is not exclusively in satisfying the needs of individual customers or the employee. Either the auditor owes the responsibility to the decision makers internally or externally since they use the information believing there are no material misstatements in those financial statements (Hoa, Pham et al. 73). The responsibility of the auditor is, therefore, to act in the interest of the public since the perception of audit quality is necessary to ensure public confidence in public accounting profession. Scope of internal auditing According to IIA (2015), the definition of internal audit states the essential purpose, nature and the extent of internal auditing. IIA identify internal audit as an independent, purposeful assurance and consulting undertaking intended to improve value and functions of a firm.

Arthur Shawcross Killer - 974 Words

People move all the time. Whether the relocation is due to personal or professional reasons, most often is it to start a new, and better, life. The community doesn’t usually know that new members are present and they go about their daily lives. In April of 1987, Rochester, NY gained two new members of the community and they were none the wiser until women, mainly prostitutes, began to disappear and then would turn up murdered starting in early 1988. Arthur Shawcross, relocated to Rochester after being paroled and having his criminal record sealed, was given the ability to start a new life, but he returned to his old habits of mutilation and murder by killing 11 women over two years. There are numerous categories and classifications of†¦show more content†¦First attributed to Aristotle was the concept of the tabula rasa, or blank slate. He believed that a person was born pure and their interactions with the world shaped their persona. From the moment we are born, we observe the world around us and, for good or bad, retain bits and pieces that collectively make up our personalities. In the video Inside the Killer’s Mind, neurologist Dr. Jonathan Pincus posited that brain damage coupled with a history of abuse could result in aggressive behavior. â€Å"The violent ones were all neurologically impaired on examination.† He discussed a cyst found on Shawcross’ MRI in the temporal lobe that by itself wouldn’t necessarily be significant, but coupled with an EEG spike in the same area it indicated an abnormality. Also in the film, Dr. Dorothy Lewis stated that in her exams of violent children she â€Å"found that these kids had more accidents, injuries, illnesses and hospitalizations than other kids.† I believe that brain injuries and abnormalities could account for elements of personality that are attributed to empathy, inhibition and moral concepts; characteristics sometimes lacking or poorly displayed in those wit h criminal behaviors. Shawcross had other physical conditions noted in the textbook: he had kryptopyrroluria, was hospitalized for an inflammation of the brain and hadShow MoreRelatedScience Of Hereditary Transmission, Responsible For Self Duplication And Protein Synthesis4012 Words   |  17 Pages(non-reproductive cells) and meiosis (reproductive cells). [2] Nativism and Empiricism are extreme theories in which they aim in trying to answer the question of â€Å"nature vs nurture†; which of these theories most influence/have the most impact on serial killers to do what they do, and to believe what they’re doing is right. The debate specifically focuses on individual differences, principally psychiatric disorders (for example, anxiety disorders or depression) or intelligence. [26] Those who go by the nameRead MoreAnimal Cruelty Is A Tremendous Issue Concerning The United States1663 Words   |  7 Pagesthere is a myriad of research and statistics that emphasizes how several components increase the link between abuse to animals and abuse to humans. The largest components are: households where domestic violence occurs, individuals who become serial killers, and individuals that grew up with a disturbing childhood. Animal welfare laws convey the intent of making sure animals are being treated fairly. Strand (2014) found that â€Å"In its simplest form, animal welfare refers to the relationships people haveRead MoreAnalysis Of Danny Torrance s The Night 1311 Words   |  6 Pagesof   his feeling of isolation. Abuse at a young age is a very common cause of   psychological disorders. In the Documentary, Interview with a Serial Killer, Arthur Shawcross (a serial killer and a diagnosed psychopath ) explains his experiences of hallucinations and how they lead him to kill more than ten people. When under psychiatric evaluation, Arthur reveals that he was sexual abused by his mother at a very young age.   Although King never explicitly states that Danny was sexually abused, it canRead MoreEssay The Making of a Serial Killer, An Annotated Bibliography1410 Words   |  6 PagesAnnotated Bibliography: Brogaard, Berit. The Making of a Serial Killer. Psychology Today. Sussex Directories, Inc., 7 Dec. 2012. Web. 03 May 2014. Berit Brogaard, D.M.Sci., Ph.D., is a Professor of Philosophy and the Director of the Brogaard Lab for Multisensory Research at the University of Miami. She earned a medical degree in neuroscience and a doctorate in philosophy. This article explained the traits of a psychopath, such as their callous, manipulative, and cunning behavior, along withRead MoreEssay on The Connectio Between Animal Cruelty And Human Violence1543 Words   |  7 Pageskicking and beating them, poisoning and butchering these poor creatures, and what makes me sick to my stomach, is that some of these people do it for fun!! I recently ran across a link to a web page that contained a online petition to put a cat’s killers to justice with maximum sentence. This is the article I found on this brutal torture of an innocent creature. ***WARNING*** (graphic details) â€Å"On October 10, 1999, a beautiful female cat came willingly to the four boys who stopped on the sideRead More Serial Killers Essay2514 Words   |  11 Pageshuman nature and morality than the concept of a serial killer. What is different about the brains of these individuals whom our society finds unforgivable and unredeemable predators? Society might find a biological reason for such atrocities more comfortable than the prospects of good and evil or a mistake. This paper will catalogue and attempt to organize the current biological differences between our minds and that of a serial killer. Can Biology make us Murderers? Recent reports in scienceRead MoreNature vs Nurture2032 Words   |  9 PagesJapan. British Journal of Criminology 1999.) In a study of three serial killers, all cited the same family problems as to why they acted in the ways they did.  · Aileen Wuornos, who killed eight men and was a prostitute at the age of fifteen, was raised by grandparents who were sexually and physically abusive. In an interview she said, If Id have had a family, I wouldnt be in this predicament.  · Arthur Shawcross strangled and mutilated eleven prostitutes. He reported having a lonely childhoodRead MoreCausation of Serial Killers Essay2039 Words   |  9 Pagesexperiences as in many other serial killers triggered psychotic and/or psychopathic behaviors. Rader’s and other serial killers’ crimes may have been caused by their loss of reality as a result of psychosis, the lack of emotion, possible brain abnormalities, and personality disorders due to their psychopathology. I would argue that the inability to cope with the stresses of trauma and victimization endured during their childhood are the main cause of the formation of serial killers. Both psychopaths and psychotic

Fiscal Decentralization and Economic Growth in Pakistan Free Essays

FISCAL DECENTRALIZATION AND ECONOMIC GROWTH IN PAKITAN A Thesis Submitted to the Faculty of Institute of Management Sciences, Peshawar In Partial Fulfilment of the Requirements for the Degree of MBA (Finance) (2009-2011) Institute of Management Sciences, Peshawar Chapter 1: Introduction According to James Edwin Kee, Fiscal decentralization is the devolution of certain administrative and fiscal powers and functions to the sub-national governments. It also means the shifting of responsibility to the low-level governments with concomitant accountability. The extent of Fiscal devolution can be measured in terms of the powers of low-level governments to raise revenue or to incur expenditures. We will write a custom essay sample on Fiscal Decentralization and Economic Growth in Pakistan or any similar topic only for you Order Now Fiscal devolution in the public sector has received great attention during the last two decades for many reasons. The implications of financial autonomy on the performance of sub level government and economic growth has been studied widely both for the developing and the developed world. In transition countries, with the disintegration of centralized system, fiscal federalism emerged; and in many developing countries, like India, Brazil and Argentina, financial decentralization was debated regarding its effects on economic stabilization. Some studies have, however, suggested that the relationship between the two has not been conclusive. [Financial devolution] is reckoned as a key policy tool that ensures economic efficiency and good governance through financial autonomy of the [federating units]. It leads to the integration of provinces and enhances their participatory role in the economic development of a country. It relieves the central government from paying attention to the details of financial matters, thereby enabling it to undertake the tasks at national level in a more effective and efficient manner. Also, if the central government for some reasons becomes inefficient, then devolution can be a possible solution. It accelerates growth and empowers the low-level governments through financial autonomy and administrative empowerment. The devolution makes the federating units more responsible as it brings the government closer to the people. Decentralization policy has a positive effect on economic growth as it helps implement social policies in a better manner. In decentralized set ups, the lower tiers of governments know more about the necessities and developmental needs of the people, which leads to economic efficiency in service delivery, thereby accelerating the growth rate at national and regional levels. This is also called the â€Å"Oats Decentralization Theorem†. It says that if the people in one municipality are not provided with adequate public services, they may opt for shifting to other municipalities having more facilities. Financial autonomy reduces the wasteful utilization of resources by the central government. According to Bird and Smart (2002), for effective service delivery it is important that the recipient of funds has clear mandate, sufficient resources and powers to make decisions. Through decentralization, responsibilities as well as resources are devolved to the lower level governments (Rondinelli,1981). In this way , the federating units are empowered which enable them to use the resources to good effect , raise living standard of the people and distribute the work load (Gordin, 2004). In Pakistan’s case, the significance of Fiscal devolution cannot be overemphasized. Pakistan is a federation having a centralized taxation system. The major chunk of revenue is collected by the central government, which is then distributed among the provinces to remove financial disparities. Article 160 of the constitution empowers the president that he shall constitute National Finance Commission after every five years for the distribution of funds, taxes and other monetary assets among the federating units. The decision of the commission is called National Finance Commission Award. The commission is comprised of the finance ministers of the federation and the provinces and such other persons as may be appointed by the president in consultation with the governors of the respective provinces. So far, seven NFC Awards have been announced, the latest being the 7th NFC Award of 2010. Except for the 1974 Award, there has been a growing tendency in the transfer of revenue from the centre to the provinces. The 4th NFC Award was a significant move forward towards fiscal decentralization as it enhanced the share of the provinces by 18% and accepted their right over hydel profit, developmental surcharge and excise duty on crude oil. The 7th NFC Award accepted the demands of Baluchistan, KPK, Sindh by devising a formula, wherein poverty, inverse population density and under development have also been given due weightage. Moreover, the provincial share has been enhanced from the previous 47. 5% to 56%. The provinces were also given the powers to collect Sales Tax on their own. Following this decision, the Sindh Province has already undertaken this task and claims to have collected 50% more Sales Tax in the first five months of the financial year compared to the corresponding period last year [Dawn, Dec 10, 2011]. The 8th Financial Award is scheduled to be held on 16th Dec, 2011. Apart from the resource distribution Through NFC Award, Article 161 of the Constitution provides for transfer of Royalty on natural resources to the respective provinces in the shape of surcharge on gas and crude oil. This will lead to greater transfer of funds from the centre to the provinces. With the 18th Constitutional amendment, the concurrent list has been abolished, and with it entry No. 49 in the 4th Schedule to the Federal Legislative list has also been amended. As a result, the GST Services in Federal Excise mode have been assigned to the provinces. Despite the presence of this constitutional mechanism for resource distribution, the smooth allocation of funds was interrupted due to deadlocks among the provinces over the distribution formula, and, resultantly, the NFC Award failed to narrow down the vertical and horizontal resource gaps. At the district level, The National Reconstruction Bureau launched a decentralization programmed through Government Plan 2000, wherein it was acknowledged that without Fiscal Decentralization no authority is devolved, which further emphasizes the importance of transfer of funds to the lower tiers of government. The above paragraphs portray only one side of the picture. There are many studies which suggest that there is no direct relationship between fiscal devolution and economic growth and efficiency at the level of sub-national governments. As a matter of fact, there is also a strong case against the Fiscal federalism. It may lead to social inequalities as for instance, incomes and taxes may not be equitably distributed among the various regions of a country. Also, fixed costs are associated with running administrations of low-level governments. So, in low-income countries it may not be justified to spend substantial amount of the available funds on these expenses (Homme,1995). The relationship of Fiscal devolution and economic growth has been studied extensively in recent years. So, large volume of literature is available on the topic. Different relationships were studied to establish any clear relationship between Fiscal devolution and economic growth, but inconsistent results were obtained both for the developed and the developing economies. Some studies have shown positive relationship, others negative and still others no relationship at all between economic growth and fiscal autonomy. For Pakistan, too, studies have yet to find any clear relationship between financial decentralization and economic growth. Important contributions on this subject have been made by Zang and Zou(1998) ,Xie , Zou and Davoodi (1999) , Lin and Liu (2000) , Thieben (2001) , Martinez-Vazquez , McNab(2001) , Felenstine Iwata (2005) and Kardar (2006) etc. This study identifies strengths and weaknesses of the existing Resource Distribution System (RDS) through historical review. It is generally believed that that proper information about the existing RDS will lead to better policy formulation, which will ultimately put the country on the road to prosperity. In this connection, it is also worthwhile to analyze the implications of the current resource distribution policies on the economic growth of the country. Thus, this study helps ascertain the extent of financial autonomy of the provinces and measures its long term benefits. Rest of the study is arranged as follows: Chapter 2 pertains to Literature review i. e. study conducted previously by other researchers on this topic; In chapter 3 theoretical background and econometric methodology for our estimation is being discussed; chapter 4 discusses sources of our data and construction of variables; chapter 5 covers results and interpretation thereof results and chapter 6 is about the conclusion of research. Chapter 2 Literature Review 2. 1 Introduction In this chapter, we discuss the empirical studies related to our study i. e. work done previously by other researchers on this topic. 2. 2 Previous empirical studies The significance of relationship between the financial autonomy and economic growth can be gauged from the volume of literature available on this topic. Various important relationships were studied to establish clear relationship between the two, but inconsistent results were obtained both for the developed and the developing economies. For Pakistan too studies have yet to find any clear relationship between financial decentralization and economic growth. On leafing through the pages of available literature, one comes across valuable work on the topic, some of which is discussed in the following paras: Davoodi and Zou (1998) developed a theoretical model for studying the relationship between Fiscal autonomy and economic growth on the basis of averaged panel data of 46 countries. The study showed a negative relationship between the two for developing countries. Zhang and Zou (1998), while using China’s provincial panel data for the period 1978-1992, found a negative association between provincial economic growth and the degree of financial autonomy over the past fifteen years. Philips and Woller (1997) studied the above referred relationship for seventeen developed and twenty three less developed countries on the data collected for the period 1974 to 1991. A negative weakly significant relationship was found for the developed world. However, no such relationship could be proved between the two variables for the less developed countries. Xie , Zou and Davoodi (1999) observed that there is a highly insignificant relationship between Fiscal Decentralization and economic growth for the United States, which the authors attributed to the fact that the country had already reached optimal level of fiscal autonomy and thus no further progress on this line was possible. Thieban (2001) made use of OECD countries cross sectional data for the period 1975 to 1995, but the study failed to establish any link between revenue decentralization of the low-level governments and economic growth of these countries. Martinez –Vazquez and Mc Nab (2001) concluded that the relationship between fiscal decentralization and economic growth is still unclear, and that little attention has been paid to indirect factors through which fiscal devolution may influence economic growth. In contrast to the above findings, Lin and Liu (2000), while using panel data of 28 provinces for the period 1970 to 1993, arrived at the conclusion that there exists a positive relationship between fiscal decentralization and economic growth in China. The authors noted that the impressive growth of china for the last twenty years can be linked to fiscal reforms. Ebel and Yilmaz (2001), observed that Fiscal design of OECD countries is unable to explain Fiscal decentralization in true sense. Martinez –Vazquez and Mc Nab (2003), on the basis of panel data, covering the period 1972-1997, studied the direct and indirect relationship between fiscal decentralization, economic growth and macroeconomic stability . They arrived at the conclusion that devolution minimizes the inflation rate, has no direct influence on economic growth, and has positive indirect effect on growth as it results in on macroeconomic stability. Justin Yifu and Zhiqiang (2000), investigated the implications of fiscal decentralization of economic growth in China, and found that it has made remarkable contribution to economic growth. This finding is in conformity with the hypothesis that Fiscal devolution enhances economic efficiency. Fielstentein and Iwata (2005), while using VAR (Vector Auto regressive) model found that there is a relationship between decentralization and macro economic performance in China. They concluded that Fiscal decentralization is positively related to growth in the period after the war, and has negative effects on the inflation rate after the 1970s. While using the cross country data for 78 countries, Mello and Barenstein (2001) observed that as the share of receipts, including non-tax revenue, grants and transfer of funds, from the federal government increases in the total provincial revenues, the relationship between financial devolution and governance grows stronger. Shah (1991) pointed out that poor performance in most of the developing countries in the last 40 years can be attributed to highly centralized regimes. Huther and Shah (1998) noted that good governance and fiscal decentralization are positively related, which in turn may enhance economic growth. Akai and Sakata (2002) used single country data and predicted that fiscal decentralization plays a role in economic development. They pointed out that in the United States, high government spending was required in the initial phases of economic development, therefore, any analysis that took into consideration this period is bound to overestimate the role of central government in the economic development. This led Xie et al (1999) to declare that decentralization has adverse effect on economic development. Jorge Martinez-Vazquez and Mark Rider (2006) pointed out the structure of financial system plays a pivotal role in determining the conduct and performance of low-level governments, which indirectly influence economic growth of a country. According to them, though both China and India show great financial decentralization, the central governments restrict the fiscal autonomy of the sub-national governments through conditional grants and inadequate powers to raise revenue. Thus, the regional governments are forced to use extra budgetary allocations to overcome their financial constraints, which results in waste of resources. These structural infirmities in the financial systems entail profligacy and unproductive expenditure policies, which may hamper the growth rate in the future in both the countries. Nobuo Akai, Yukihiro Nishimura and Masayo Sakata (2007), while using panel data of the fifty states of the US, showed that fiscal decentralization minimizes the variance of GDP growth due to decentralization among various levels of government. They also observed that there exists a negative relationship between fiscal devolution and economic volatility. Hiroko Uchimora and Yurika Suzuki (2009) studied Fiscal Decentralization in the Philippines after the promulgation of Local Government code (1991) . This study examined the fiscal relationship between the central and sub national governments by using the indicators of Fiscal decentralization. According to their findings, in the Philippines, the responsibility to incur expenditures by the local governments is not accompanied by corresponding strengthening of the fiscal capacity. As a result, local governments rely heavily on fiscal transfers from the central government and Internal Revenues Allotment, which render the local finance unstable. Atushi Alimi(2004) Although , in theory, decentralization promises efficient provision of public services at local level, empirical evidence gives a mixed picture regarding its implications on economic growth. They attempted to resolve this inconsistency by using instrumental technique on the data for the period 1997 to 2001. In this study, fiscal decentralization is measured in terms of the ratio between local expenditure to total government expenditure. The result showed a significant positive relationship between per capita growth rate and Fiscal decentralization. Perraton, J. and Wells, p. (2003), in their paper, ‘Multi level governance and Economic cohesion’ noted three general trends in economic policy making: the transfer of powers to supranational institution in economic policy formulation, e. g. he formation of the European Union and World Trade Organization; secondly, almost all developed countries have established regional organizations, to which powers of economic policy-making have been devolved. In the transition states, there is a growing tendency towards decentralization to curtail expenditures and to make the governments more accountable; thirdly, the governments are now inclined to reduce their sizes and make alternate arrangements for governance through NGOs. This concept o f governance is referred to as multi-level governance. In Pakistan’s case, Fiscal Federalism has been studied in detail. According to Anwar Shah, World Bank (Dec, 2006), there are two ways of transferring funds from the Centre to the provinces: assigning share of the federal revenues to the provinces at a pre-determined rate and direct transfer of funds (other than revenue) from the Centre to the provinces. According to him, the revenue sharing system in Pakistan affects the transfers in a lump sum and predictable manner to the federating units, which are at liberty to use these funds the way they choose. The author further argues that NFC places greater responsibility of revenue collection on the Federal government, thereby making the tax machinery efficient and tax compliance cost effective. The Revenue sharing system may have its merits, but it is also associated with certain demerits. For example, the provinces enjoy vast discretion in the utilization of funds, but have no control over the amount of funds they receive from the centre ; the federal government cannot influence the provinces to set priorities for achieving uniform standards in reas like health and Education; the provinces receive the funds without any strings attached to it , therefore, they feel less accountable while spending the funds; the share received by the provinces have no relation with the expenditures they incur, as usually the expenditures outgrow the rate at which the Federal revenue grows. Nighat Bilgrami and Mahpara Sadaqat (2006) have given an account of evolution and working of NFC Award ever since i ts introduction in 1951. According to the authors, with the exception of 1974 Award, there is a growing tendency in increase of revenue transfer to the provinces. The major step forward in this direction was the 1991 NFC Award, wherein new taxes were included in the divisible pool. In addition, as envisaged in Article 161 of the Constitution, royalty on crude oil and surcharge on gas were also transferred to the provinces. This caused greater decentralization of funds, which over a period of time played a pivotal role in improving service delivery in health, education and irrigation etc sectors. The paper identifies various forms of fund transfers from the Federal government to the provinces. These include Revenue Sharing Transfers, Straight transfers, Recurring Grants, Development Grants and loans. The authors have also elucidated that how resources are transferred in Pakistan from the federal government to the provinces in four ways: from the centre to the provinces, from provincial to local governments, from the federal government to the local governments and from local to local governments. The paper also gives a rationale for transfers of resources from the federal to provincial and municipal governments. At the end of the paper, the authors have suggested that smaller provinces be provided with soft loans and factors like backwardness and poverty be also considered while allocating the resources. Moreover, the provinces should be allowed to generate revenues that fall within their domain. Iftikhar Ahmed, Usman Mustafa and Mahmood Khalid (2007) have dilated upon the evolution of resource distribution over time. According to them the divisible pool has been expanded by the inclusion of more taxes. However, as population is the sole criteria for the distribution of resources through NFC awards, it has given birth to serious differences among the provinces. The paper says that resources are transferred from the centre to the provinces in two ways: Systematic or Formula Based transfer, comprising of revenue sharing and Random transfer, including grants, executive discretionary funds and Parliamentarian funds etc. According to the authors, with the passage of time the federal government has become more centralized, thereby adversely affecting the efficiency of the provincial governments. The federal government has got engaged in activities that purely fall within the purview of provinces. These include irrigation, roads, culture, tourism, youth affairs etc. This has increased the burden on federal government. The Federal government collects 93 % of the revenue but expends only 72%, whereas the provinces generate just 7% but spend 28%. The argument behind greater revenue collection by the centre is that it is more efficient in revenue collection than the provinces. But this argument is flawed as the provincial and local governments are left with lesser opportunities to collect revenue. This results in the dependency of the provinces on the federal government for transfer of resources. In this paper, NFC Award has also been criticized in that the criteria for resource distribution are mainly population. Elsewhere in the world, other factors like backwardness, population density, and revenue generation are also considered while devising a formula for distribution of resources. According to the authors, the major shift towards fiscal decentralization appeared in the 1996 NFC Award, whereby all duties and taxes were included in the divisible pool. By so doing transparency and predictability in resource distribution was though enhanced, yet the resource distribution formula between the federal and provincial governments changed little. The paper says that resources distribution has never been taken seriously. Only one criterion, that is population, has been followed for resource distribution, that’s why the NFC Award has failed to resolve the problem of Fiscal Decentralization. Usman Mustafa (2011) has highlighted the importance of federal form of government and has argued that even European Union has the characteristics of federalism. While referring to works of notable authors on the subject, it has been argued that Fiscal Decentralization increases efficiency, transparency and accountability. According to the author, in Pakistan’s case, there are pre-federalism (from 1947-71) and post federalism (from 1973 onwards) periods. In the first perid, the authority was centralized (one unit), whereas the second period is characterized by the march towards decentralization of powers from the centre to the provinces. In this context, the author argues that NFC Award is a step forward towards decentralization. He, however, criticizes population being suitable criteria for resource distribution between the centre and the provinces. In order to remove the grievances of the smaller provinces, a historical decision was taken in the 7th NFC Award on Dec, 2009 at Gawadar, to which all the provinces agreed. In this award, the demands of the smaller provinces were accepted, and a multifactor formula was devised. In the formula, factors like poverty, underdevelopment and inverse population density were also included for resource distribution. Moreover, the Federation sacrificed more that 10% of its share in favour of the provinces. It was also agreed that collection charges received by the Federal government on revenue would be curtailed from the existing 5% to 1%. This will increase the volume of net transfer of revenue from the federal to the provincial governments. All these decisions taken in the 7th NFC Award will contribute favourably towards Fiscal Decentralization in Pakistan. According to Kardar (2006), local governments have significance both in the context of Devolution plan and failure of central and provincial governments to deliver quality services to the masses ever since the emergence of Pakistan. He further argued that though legislation on devolution is a landmark achievement, the biggest challenge is to settle the row over powers between the provinces and district governments. Dr. Shahnawaz Malik, Mahmood-ul-Hassan and Shahzad Hussein analyzed the relationship between Fiscal decentralization and economic growth for the period 1971-2005. They obtained mixed results on the basis of different variables used in analysis. The study further showed that with the continuous rise in the share of provincial government revenues and expenditures, economic growth slows down. Naeem-ur-Rehman Khattak, Iftikhar Ahmed and Jangraiz Khan, while using time series data, for the period 1980 to 2007, analyzed the resource distribution, and studied the impact of financial decentralization on the economic growth of Pakistan. According to them, the divisible pool has expanded over the years by the inclusion of more taxes in it. They pointed out that the resource distribution mechanism failed to affect economic growth positively, and suggested that the distribution formula be revisited, having regard to factors like tax collection and backwardness of the provinces. They further suggested that more powers be delegated to the provinces to raise their own revenues. Chapter 3 THEORETICAL BACKGROUND AND ECONMETRIC METHODOLOGY 3. 1 Introduction In this chapter we discuss the theory which guides our research, variables of our model, type of statistical relationship and the model we will use for estimation. 3. 2 THEORETICAL BACKGROUND Various forms of Decentralization. It refers to the delegation of powers and functions from the central to low-level governments. There are three main forms of decentralization (JICA 2008): . 2. 1. Decentralization It is the weakest type of decentralization, and refers to the transfer of decision making powers along with financial and management responsibilities from the officials in the centre to those serving in the local /regional offices. 3. 2. 2. Delegation Here the powers are delegated to the autonomous bodies, including corporations, housing authorities’ etc. , working under the supervision of the central go vernment. These organizations enjoy vast discretion and decision making powers. 3. 2. 3. Devolution It is the gradual transfer of administrative, financial and political authority to the local bodies, which exercise their powers and functions within certain geographical confines. It has three main constituents, as discussed below: a) Political decentralization It refers to the shifting of powers and authority to local bodies, run by local political representatives. It has a well-established system of political decision-making and accountability at the local level. b) Administrative decentralization It is the form of devolution whereby staff of line ministry is dissociated from their corresponding ministries and brought under the control of the local administration. This is done through establishing local pay roll, which empowers them to reward and punish the staff. c) Fiscal decentralization It refers to the shifting of authority and responsibility to the sub-level governments with regard to decision-making on distribution of financial resources. This also includes the powers to raise local revenue. Fiscal decentralization has attracted great attention, among the economic circles, especially for improving service delivery at the local level. The main objectives of Fiscal decentralization include efficient utilization of resources, effective service delivery, macroeconomic stability and economic growth. With these objectives in view, the developing world is following the principle of Subsidiarity, which emphasizes that authority should rest with the lower tiers of government for effective use, and that the responsibility of incurring expenditures should match with adequate financing. Decentralization leads to efficient utilization of funds through improvement in governance, as lower strata of government can better assess people’s problems and know their priorities. Decentralization enhances participation of local population as the beneficiaries are directly involved in planning the allocation of funds. Increased decentralization gives birth to democratization, which keeps the government close to the masses, thereby making it more accountable. 3. 3 Various theories regarding decentralization The above narrated advantages, and many more not discussed here, emphasize the importance of Fiscal decentralization. But it was since the publishing of Tiebout’s article, â€Å"A pure theory of local Expenditure† that this concept has gained great popularity among the theorists, and the volume of literature on this topic has increased tremendously. According to Tibeout (1956), Fiscal decentralization improves production efficiency through greater mass mobilization. In 1959 Musgrave pointed out that the role of government is to bring stability to the market and effect the redistribution of income. He further argued that efficient utilization of resources can be secured only when local tastes and choices are taken into consideration. Oates (1972) pointed out that people living in different localities have peculiar tastes and preferences for public service, therefore, local governments, as against central government, being better informed, will provide better services to its citizens. This concept is called Oates â€Å"Decentralization Theorem†, according to which economic efficiency can be enhanced by decentralizing the availability of public goods and services. Thus, the central government should be responsible for devising a national policy and providing efficient levels of government for distribution of goods . (Oates,2005) So, equipped with the requisite paraphernalia , the sub-national governments are in a better position to put in place welfare-maximizing policies. Cremer, Estach and Seebright (1994), stated that government at the centre cannot reach the information about local tastes and choices. Thus, it is through Fiscal Decentralization that local agents can bring about efficient supply of goods and services to their constituencies. Almost identical views were expressed by Qian and Weingast (1997), who opined that decentralization puts a check on budget expansion by promoting competition and strengthening accountability, which effects supply of goods and services in an efficient manner. Having said this, there is always a tendency among the local political agents to enlarge the scope of public goods and services at the cost of other jurisdictions. Rodden (2003) attributed this predilection to the type of decentralization being followed. If decentralization is dependent on self-generated tax revenue, smaller governments emerge; and if transfer of funds occurs from the centre, it results in budget expansion. Though from economic and political point of view there are many benefits of Fiscal decentralization, yet it is not a cure for all ills. For instance, Fiscal Decentralization entails loss of Economies of Scale and loosens control over scarce resources. From it follows that centralization and Decentralization are not alternatives, rather the countries should find a balance between the two as per their requirements. . 4. Rationale for Fiscal Transfer in Pakistan The first reason is the general perception that the federal government is better equipped to collect major taxes, but is inefficient to collect smaller taxes. Also, the federal government may undertake major projects, but fail to deliver on smaller projects. Hence, the efficiency criteria must be followed while deciding allocation of means and responsibilitie s. The second reason for resource transfer from the centre to the provinces is that the latter lack the resources to finance the provision of even basic services. In the last ten years, the average revenue generated by the centre, provinces and municipalities stand at 89%, 5% and 6% respectively. As against the revenue generation, the share in recurring expenditure of the federal, provincial and municipal governments is 74%, 23% and 4% respectively. As regards developmental expenditure, the share of these governments is as follows: Federal government 65%, provincial government 25% and municipal governments 6%. These figures indicate that the provinces have limited resources vis-a-vis the amount of expenditure they incur. This necessitates the transfer of resources from federal to lower-tiers of government. Another reason that can be attributed to the allocation of resources among the different levels of government is Adequacy of Revenue. This concept refers to the capability of government not only to generate the initial revenue required to start a project but also to its ability to sustain it. In Pakistan’s case, Adequacy of revenue does not exist; hence transfer of resources to the lower tiers of government is necessary if they are to undertake any such projects. The fourth reason of transfer funds from the centre to the provinces is that there are taxes which though provincial in nature but is collected by the federal government, for example Sales Tax. Another rationale for transfer of funds is that federal government uses certain taxes for the overall stabilization of the economy; hence they should be under the control of the federal government. [NFC AWARDS Commentary and Agenda, Nighat Bilagarami, Jaffery and Mahpara Sadaqat (2006)]. 3. 5 ECONMETRIC METHODOLOGY 3. 5. 1Augmented Dicky Fuller (ADF) Test In this study a time series data is being used. Since this kind of data is usually non-stationary in nature, we first test it for stationarity or non-stationarity. For this purpose, an enhanced version of Dicky fuller Test, known as Augmented Dicky Fuller Test, is being employed. The ADF includes extra lagged terms of the dependant variable so as to remove auto-correlation. The following equations denote the three possible forms of ADF Test. i) Without any constant and trend ?yt=? *yt-1+i=1p? i? yt-i+et ii) Constant with non trend ?yt=a+? *yt-1i=1p? i+? yt-1+et iii) Constant with trend ?yt=a+? t+? *yt-1+i=1p? i+? yt-1+et Of the above equations, (iii) represents a more generalized form of ADF Test. Mackinnon(1991) gave critical values for the DF test The critical values for the ADF Test are the same as those for Dickey Fuller Test. If the DF Statistical value is smaller than the critical value, Null hypothesis of a unit root is rejected, which suggests that the yt is stationary process or the variables are stationary. If on running the ADF Test the variables are found non-stationary in their original levels of series, the variables are made stationary in their first difference level of the series. . 5. 2 Ordinary least square model (OLS) Once the variables are made stationary, estimation is made by employing Ordinary least square model (OLS). This model is suitable for ascertaining linear interdependencies in a time series data. Here it is also worthwhile to discuss Regression model. A multiple linear regression model estimates value of dependant variable (also called response variable) on the basis o f independent variables (also called explanatory variables). But there is always a difference in estimated and observed values. Therefore, a Regression model also possess unexplained variable, also called error term, which measures the difference between observed and estimated values. y= b+b1 x1+ b2 x2+ b x3 †¦Ã¢â‚¬ ¦ +ei A regression model will be â€Å"best fit† if the difference between observed and estimated value is minimum. We cannot take error term by simply adding all the difference between observed and estimated value because it may contain both positive and negative values which can cancel the effect of each other. So, we take the square of error terms which leads us to OLS . i. e. minimum squared difference. OLS is useful for structural inference and policy analysis. For the purpose of Structural Analysis of data, certain assumptions regarding the causality of data are made. These are : error term (i) is normally distributed (ii) has zero expected value of mean (iii) has constant variance in each time period and for all values of X and (iv) its value in one time period is unrelated to its value in another time period. OLS is a very simple technique by which we can calculate the coefficient of each variable in other words it gives us the impact of one variable on another variable, which is summarized by impulse response function. | | | | | Chapter 4 DATA AND VARIABLE 4. 1 INTRODUCTION This chapter covers how data is collected, what are sources of our data and how variables have been constructed variables for our estimation. 4. 2 Data type For the purpose of studying the relationship between Fiscal decentralization and economic growth, secondary data is being utilized. 4. 3 Sources of data For the purpose of this study the following sources have been utilized. i) Issues of â€Å"Economic survey of Pakistan† ii)World Development Indicators iii)Ten years in Pakistan Statistics† (1983) iv)UNDP Human Development Report, 2007. )Hand book of Statistics on Pakistan Economy (2005)† 4. 4 Construction of variables Economic growth of the country is taken as dependant variable. It is measured in terms of per capita Log of per capita gross domestic product (LYP), which is rebased by the year 2000 market prices. The variable is expressed in real terms using GDP deflator to ascertain the pattern of economic growth over the years. The Fiscal decentralization is captured on the ratio of Provincial share in Total Revenue to the Total Revenue (PRFR). The data source for these variables is â€Å"Economic survey of Pakistan and covers the period from 1964 to 2008. As regards investment, it is captured by the Gross Fixed Capital Formation (GFCF) and data is taken from â€Å"Pakistan Economic Survey† Moreover, a variable for trade openness (OPN) is also used in the estimation model. This variable is obtained by adding imports and exports and dividing the same by LYP (at market prices). Here, too, the source of data is â€Å"Economic Survey of Pakistan† Other variables in the estimation model are Tax to GDP ratio (TGDP) and GINI co-efficient, the latter being used to calculate income equality and its source is UNDP Human Development Report. Chapter 5 RESULTS AND DISCUSSION . 1 INTRODUCTION The section consists of results and their interpretation. In para 5. 1, 5. 2 and 5. 3 Stationarity of data, Autocorrelation and the results of OLS model respectively have been discussed. 5. 2 Unit Root test In a time series data, the major problem is the non-stationarity of variables. So, before estimation, a test is applied to make the variables stationary. For this purpose various tests can be employed, but in our case we have used Augmented Dickey Fuller test, the results of which are shown in table 5. 1 below. Table 5. 1 UNIT ROOT TEST| Non stationary variables| ADF-value| 5% Critical value| Gfcf| -1. 693492| -2. 9303| Gini| -2. 462911| -2. 9303| Lpy| 0. 863730| -2. 9303| PRFR| -2. 206432| -2. 9303| TGDP| 0. 158213| -2. 9303| Stationary variables| | ADF-value| Critical value| Gfcf| -3. 997577| -2. 9320| Gini| -4. 766215| -2. 9320| Lpy| -4. 632922| -2. 9320| OPN| -3. 453532| -2. 9303| PRFR| -3. 662186| -2. 9320| TGDP| -3. 01612| -2. 9320| Gfcf- Gross fixed capital formation, Gini- Income inequality, Lpy- Log of GDP, OPN- Openness to trade (export+import/GDP), PRFR- Ratio of provincial shares in total revenue to total revenue, TGDP- Tax to GDP ratio. At the level, all the variables except â€Å"OPN† were found non-stationary, and were, therefore, stationarized at First difference level by using ADF Test. 5 . 3 TEST FOR AUTOCORRELATION Autocorrelation tells about the relationship between two or more error terms in the model. For unbiased estimation, autocorrelation must be zero. If there exists problem of autocorrelation, it has to be removed. For this purpose, two hypothesis are constructed : one, H0: Co-Var(u,u+1)=0,there is no autocorrelation between the error terms and second, Ha: Co-Var(u,u+1)not equal to zero, meaning there is a problem of autocorrelation. To check autocorrelation in our model, we have used Breusch-Godfrey Serial Correlation LM Test (BG TEST), as shown in table 5. 2. According to the table, probability of F-statistic is significant at 5%, so we reject the hypothesis that cov (ut, ut+1) is equal to zero. In other words, there is autocorrelation problem in our model. In order to remove the autocorrelation problem, we have applied ARMA model with autocorrelation through AR (1), AR (3) and MA (2). Breusch-Godfrey Serial Correlation LM Test:| F-statistic| 4. 781666| Probability| 0. 001241| Obs*R-squared| 20. 50376| Probability| 0. 002252| Probability of F-statistic is significant at 5%, so we reject the hypothesis that cov (ut, ut+1) is equal to zero. It means there is autocorrelation problem in our model. 5 . 4 ESTIMATION The results of the estimation with OLS are tabulated in Table 5. 3 below: Dependent variable:LPYMethod: Least Squares| Date: 03/25/12 Time: 11:13| | | | | | Variable| Coefficient| t-Statistic| Prob. | | GFCF| 0. 004693| 3. 806074| 0. 0006| | GINI| -0. 324275| -2. 919698| 0. 0065| | OPN| 0. 000254| 0. 468847| 0. 6425| | PRFR| -0. 000173| -0. 517278| 0. 6086| | TGDP| -0. 003194| -0. 809929| 0. 4242| | | | | | | R-squared| 0. 97793| Prob(F-statistic)| 0. 000000| Adjusted R-squared| 0. 997081| | | Durbin-Watson stat| 1. 705104| | | | | | | In the model ‘’R^2’’ shows strength of the regression line, which means how much important variables are covered by a model or how well variation in independent variables explains the variation in dependent variable. For time series analysis â€Å"R^2’’ value must be greater than 0. 70 or 70%, which means the model must explain at least 70% of the total variation in dependent variable. In our results, â€Å"R^2=99%† value is greater than 70%, so 99% of variation LPY is explained by our variables i. . GFCF, GINI, OPN, PRFR, TGDP. But the values in the 3rd column against each variable show â€Å"t† values. If the t value, in absolute form, is greater than â€Å"2†, the relationship between the variables is significant. In our case, the financial autonomy is measured in terms of â€Å"Ratio of Provincial share in Total Revenue (PRFR)†, whereas the Economic growth is captured on the variable LPY. It is evident from the table that the relationship between LPY (dependent) and PRFR (independent) is insignificant because the â€Å"devalues, in absolute form, are less than â€Å"2†. It implies that LPY is not influenced by PRFR. In other words, in Pakistan’s case, Fiscal decentralization has no bearing on economic growth. The model shows that GFCF and GINI with variables have ‘’t’’ value greater than 2 in absolute form affect economic growth. Durbin-watson value in the table tells us about the problem of auto-correlation in the model. If the value of Durbin-watson test is between 1. 7 and 2. 2 there will be no auto-correlation. In our table its value 1. 7, so we say that the problem of auto-correlation has been removed. CHAPTER NO: 06 CONCLUSION This study focuses on identifying the impact of fiscal decentralization on economic growth through compilation of its historical trends. It is generally believed that that proper information about the existing fiscal decentralization system will lead to better policy formulation, which will ultimately put the country on the road to prosperity. In this regard, it is also worthwhile to analyze the implications of the current fiscal decentralization policy on the economic growth of the country. Thus, this study helps ascertain the extent of financial autonomy of the provinces and measures its long term benefits. In this study secondary data has been used, which covers the period from 1964 to 2008. Provincial share in total revenue (PRFR), GFCF- Gross fixed capital formation, Gini- Income inequality, OPN- Openness to trade (export+import/GDP), PRFR- Ratio of provincial shares in total revenue to total revenue, TGDP- Tax to GDP ratio are dependant variables, whereas LPY (Log of GDP) is dependent variable in the data. We used OLS model for our estimation, the results of which revealed that only GFCF and GINI have significant impact on GDP growth. On the other hand the influence of, OPN, TGDP and PRFR on economic growth (LPY) are insignificant. As PRFR and LPY measure the extent of fiscal decentralization and Economic growth respectively, we conclude that economic growth in Pakistan does not depend on fiscal decentralization. This may be due to the fact the Resource Distribution Formula has been mainly based on population. The results of other factors, included of late in the NFC Award, are yet to be seen. It is, therefore, proposed that not only the impact of population in the distribution formula be diluted by the inclusion of other factors, being emphasized by the smaller provinces, but also the powers of the provinces with regard to revenue generation be enhanced. ——————————————– [ 1 ]. The words, Financial devolution, financial autonomy and Financial /fiscal decentralization are being used interchangeably in this study. [ 2 ]. In this discussion ,the words, federating unit, unit, province, sub-national government and low-level government will be used interchangeably. 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FISCAL DECENTRALIZATION AND ECONOMIC GROWTH IN PAKITAN A Thesis Submitted to the Faculty of Institute of Management Sciences, Peshawar In Partial Fulfilment of the Requirements for the Degree of MBA (Finance) (2009-2011) Institute of Management Sciences, Peshawar Chapter 1: Introduction According to James Edwin Kee, Fiscal decentralization is the devolution of certain administrative and fiscal powers and functions to the sub-national governments. It also means the shifting of responsibility to the low-level governments with concomitant accountability. The extent of Fiscal devolution can be measured in terms of the powers of low-level governments to raise revenue or to incur expenditures. We will write a custom essay sample on Fiscal Decentralization and Economic Growth in Pakistan or any similar topic only for you Order Now Fiscal devolution in the public sector has received great attention during the last two decades for many reasons. The implications of financial autonomy on the performance of sub level government and economic growth has been studied widely both for the developing and the developed world. In transition countries, with the disintegration of centralized system, fiscal federalism emerged; and in many developing countries, like India, Brazil and Argentina, financial decentralization was debated regarding its effects on economic stabilization. Some studies have, however, suggested that the relationship between the two has not been conclusive. [Financial devolution] is reckoned as a key policy tool that ensures economic efficiency and good governance through financial autonomy of the [federating units]. It leads to the integration of provinces and enhances their participatory role in the economic development of a country. It relieves the central government from paying attention to the details of financial matters, thereby enabling it to undertake the tasks at national level in a more effective and efficient manner. Also, if the central government for some reasons becomes inefficient, then devolution can be a possible solution. It accelerates growth and empowers the low-level governments through financial autonomy and administrative empowerment. The devolution makes the federating units more responsible as it brings the government closer to the people. Decentralization policy has a positive effect on economic growth as it helps implement social policies in a better manner. In decentralized set ups, the lower tiers of governments know more about the necessities and developmental needs of the people, which leads to economic efficiency in service delivery, thereby accelerating the growth rate at national and regional levels. This is also called the â€Å"Oats Decentralization Theorem†. It says that if the people in one municipality are not provided with adequate public services, they may opt for shifting to other municipalities having more facilities. Financial autonomy reduces the wasteful utilization of resources by the central government. According to Bird and Smart (2002), for effective service delivery it is important that the recipient of funds has clear mandate, sufficient resources and powers to make decisions. Through decentralization, responsibilities as well as resources are devolved to the lower level governments (Rondinelli,1981). In this way , the federating units are empowered which enable them to use the resources to good effect , raise living standard of the people and distribute the work load (Gordin, 2004). In Pakistan’s case, the significance of Fiscal devolution cannot be overemphasized. Pakistan is a federation having a centralized taxation system. The major chunk of revenue is collected by the central government, which is then distributed among the provinces to remove financial disparities. Article 160 of the constitution empowers the president that he shall constitute National Finance Commission after every five years for the distribution of funds, taxes and other monetary assets among the federating units. The decision of the commission is called National Finance Commission Award. The commission is comprised of the finance ministers of the federation and the provinces and such other persons as may be appointed by the president in consultation with the governors of the respective provinces. So far, seven NFC Awards have been announced, the latest being the 7th NFC Award of 2010. Except for the 1974 Award, there has been a growing tendency in the transfer of revenue from the centre to the provinces. The 4th NFC Award was a significant move forward towards fiscal decentralization as it enhanced the share of the provinces by 18% and accepted their right over hydel profit, developmental surcharge and excise duty on crude oil. The 7th NFC Award accepted the demands of Baluchistan, KPK, Sindh by devising a formula, wherein poverty, inverse population density and under development have also been given due weightage. Moreover, the provincial share has been enhanced from the previous 47. 5% to 56%. The provinces were also given the powers to collect Sales Tax on their own. Following this decision, the Sindh Province has already undertaken this task and claims to have collected 50% more Sales Tax in the first five months of the financial year compared to the corresponding period last year [Dawn, Dec 10, 2011]. The 8th Financial Award is scheduled to be held on 16th Dec, 2011. Apart from the resource distribution Through NFC Award, Article 161 of the Constitution provides for transfer of Royalty on natural resources to the respective provinces in the shape of surcharge on gas and crude oil. This will lead to greater transfer of funds from the centre to the provinces. With the 18th Constitutional amendment, the concurrent list has been abolished, and with it entry No. 49 in the 4th Schedule to the Federal Legislative list has also been amended. As a result, the GST Services in Federal Excise mode have been assigned to the provinces. Despite the presence of this constitutional mechanism for resource distribution, the smooth allocation of funds was interrupted due to deadlocks among the provinces over the distribution formula, and, resultantly, the NFC Award failed to narrow down the vertical and horizontal resource gaps. At the district level, The National Reconstruction Bureau launched a decentralization programmed through Government Plan 2000, wherein it was acknowledged that without Fiscal Decentralization no authority is devolved, which further emphasizes the importance of transfer of funds to the lower tiers of government. The above paragraphs portray only one side of the picture. There are many studies which suggest that there is no direct relationship between fiscal devolution and economic growth and efficiency at the level of sub-national governments. As a matter of fact, there is also a strong case against the Fiscal federalism. It may lead to social inequalities as for instance, incomes and taxes may not be equitably distributed among the various regions of a country. Also, fixed costs are associated with running administrations of low-level governments. So, in low-income countries it may not be justified to spend substantial amount of the available funds on these expenses (Homme,1995). The relationship of Fiscal devolution and economic growth has been studied extensively in recent years. So, large volume of literature is available on the topic. Different relationships were studied to establish any clear relationship between Fiscal devolution and economic growth, but inconsistent results were obtained both for the developed and the developing economies. Some studies have shown positive relationship, others negative and still others no relationship at all between economic growth and fiscal autonomy. For Pakistan, too, studies have yet to find any clear relationship between financial decentralization and economic growth. Important contributions on this subject have been made by Zang and Zou(1998) ,Xie , Zou and Davoodi (1999) , Lin and Liu (2000) , Thieben (2001) , Martinez-Vazquez , McNab(2001) , Felenstine Iwata (2005) and Kardar (2006) etc. This study identifies strengths and weaknesses of the existing Resource Distribution System (RDS) through historical review. It is generally believed that that proper information about the existing RDS will lead to better policy formulation, which will ultimately put the country on the road to prosperity. In this connection, it is also worthwhile to analyze the implications of the current resource distribution policies on the economic growth of the country. Thus, this study helps ascertain the extent of financial autonomy of the provinces and measures its long term benefits. Rest of the study is arranged as follows: Chapter 2 pertains to Literature review i. e. study conducted previously by other researchers on this topic; In chapter 3 theoretical background and econometric methodology for our estimation is being discussed; chapter 4 discusses sources of our data and construction of variables; chapter 5 covers results and interpretation thereof results and chapter 6 is about the conclusion of research. Chapter 2 Literature Review 2. 1 Introduction In this chapter, we discuss the empirical studies related to our study i. e. work done previously by other researchers on this topic. 2. 2 Previous empirical studies The significance of relationship between the financial autonomy and economic growth can be gauged from the volume of literature available on this topic. Various important relationships were studied to establish clear relationship between the two, but inconsistent results were obtained both for the developed and the developing economies. For Pakistan too studies have yet to find any clear relationship between financial decentralization and economic growth. On leafing through the pages of available literature, one comes across valuable work on the topic, some of which is discussed in the following paras: Davoodi and Zou (1998) developed a theoretical model for studying the relationship between Fiscal autonomy and economic growth on the basis of averaged panel data of 46 countries. The study showed a negative relationship between the two for developing countries. Zhang and Zou (1998), while using China’s provincial panel data for the period 1978-1992, found a negative association between provincial economic growth and the degree of financial autonomy over the past fifteen years. Philips and Woller (1997) studied the above referred relationship for seventeen developed and twenty three less developed countries on the data collected for the period 1974 to 1991. A negative weakly significant relationship was found for the developed world. However, no such relationship could be proved between the two variables for the less developed countries. Xie , Zou and Davoodi (1999) observed that there is a highly insignificant relationship between Fiscal Decentralization and economic growth for the United States, which the authors attributed to the fact that the country had already reached optimal level of fiscal autonomy and thus no further progress on this line was possible. Thieban (2001) made use of OECD countries cross sectional data for the period 1975 to 1995, but the study failed to establish any link between revenue decentralization of the low-level governments and economic growth of these countries. Martinez –Vazquez and Mc Nab (2001) concluded that the relationship between fiscal decentralization and economic growth is still unclear, and that little attention has been paid to indirect factors through which fiscal devolution may influence economic growth. In contrast to the above findings, Lin and Liu (2000), while using panel data of 28 provinces for the period 1970 to 1993, arrived at the conclusion that there exists a positive relationship between fiscal decentralization and economic growth in China. The authors noted that the impressive growth of china for the last twenty years can be linked to fiscal reforms. Ebel and Yilmaz (2001), observed that Fiscal design of OECD countries is unable to explain Fiscal decentralization in true sense. Martinez –Vazquez and Mc Nab (2003), on the basis of panel data, covering the period 1972-1997, studied the direct and indirect relationship between fiscal decentralization, economic growth and macroeconomic stability . They arrived at the conclusion that devolution minimizes the inflation rate, has no direct influence on economic growth, and has positive indirect effect on growth as it results in on macroeconomic stability. Justin Yifu and Zhiqiang (2000), investigated the implications of fiscal decentralization of economic growth in China, and found that it has made remarkable contribution to economic growth. This finding is in conformity with the hypothesis that Fiscal devolution enhances economic efficiency. Fielstentein and Iwata (2005), while using VAR (Vector Auto regressive) model found that there is a relationship between decentralization and macro economic performance in China. They concluded that Fiscal decentralization is positively related to growth in the period after the war, and has negative effects on the inflation rate after the 1970s. While using the cross country data for 78 countries, Mello and Barenstein (2001) observed that as the share of receipts, including non-tax revenue, grants and transfer of funds, from the federal government increases in the total provincial revenues, the relationship between financial devolution and governance grows stronger. Shah (1991) pointed out that poor performance in most of the developing countries in the last 40 years can be attributed to highly centralized regimes. Huther and Shah (1998) noted that good governance and fiscal decentralization are positively related, which in turn may enhance economic growth. Akai and Sakata (2002) used single country data and predicted that fiscal decentralization plays a role in economic development. They pointed out that in the United States, high government spending was required in the initial phases of economic development, therefore, any analysis that took into consideration this period is bound to overestimate the role of central government in the economic development. This led Xie et al (1999) to declare that decentralization has adverse effect on economic development. Jorge Martinez-Vazquez and Mark Rider (2006) pointed out the structure of financial system plays a pivotal role in determining the conduct and performance of low-level governments, which indirectly influence economic growth of a country. According to them, though both China and India show great financial decentralization, the central governments restrict the fiscal autonomy of the sub-national governments through conditional grants and inadequate powers to raise revenue. Thus, the regional governments are forced to use extra budgetary allocations to overcome their financial constraints, which results in waste of resources. These structural infirmities in the financial systems entail profligacy and unproductive expenditure policies, which may hamper the growth rate in the future in both the countries. Nobuo Akai, Yukihiro Nishimura and Masayo Sakata (2007), while using panel data of the fifty states of the US, showed that fiscal decentralization minimizes the variance of GDP growth due to decentralization among various levels of government. They also observed that there exists a negative relationship between fiscal devolution and economic volatility. Hiroko Uchimora and Yurika Suzuki (2009) studied Fiscal Decentralization in the Philippines after the promulgation of Local Government code (1991) . This study examined the fiscal relationship between the central and sub national governments by using the indicators of Fiscal decentralization. According to their findings, in the Philippines, the responsibility to incur expenditures by the local governments is not accompanied by corresponding strengthening of the fiscal capacity. As a result, local governments rely heavily on fiscal transfers from the central government and Internal Revenues Allotment, which render the local finance unstable. Atushi Alimi(2004) Although , in theory, decentralization promises efficient provision of public services at local level, empirical evidence gives a mixed picture regarding its implications on economic growth. They attempted to resolve this inconsistency by using instrumental technique on the data for the period 1997 to 2001. In this study, fiscal decentralization is measured in terms of the ratio between local expenditure to total government expenditure. The result showed a significant positive relationship between per capita growth rate and Fiscal decentralization. Perraton, J. and Wells, p. (2003), in their paper, ‘Multi level governance and Economic cohesion’ noted three general trends in economic policy making: the transfer of powers to supranational institution in economic policy formulation, e. g. he formation of the European Union and World Trade Organization; secondly, almost all developed countries have established regional organizations, to which powers of economic policy-making have been devolved. In the transition states, there is a growing tendency towards decentralization to curtail expenditures and to make the governments more accountable; thirdly, the governments are now inclined to reduce their sizes and make alternate arrangements for governance through NGOs. This concept o f governance is referred to as multi-level governance. In Pakistan’s case, Fiscal Federalism has been studied in detail. According to Anwar Shah, World Bank (Dec, 2006), there are two ways of transferring funds from the Centre to the provinces: assigning share of the federal revenues to the provinces at a pre-determined rate and direct transfer of funds (other than revenue) from the Centre to the provinces. According to him, the revenue sharing system in Pakistan affects the transfers in a lump sum and predictable manner to the federating units, which are at liberty to use these funds the way they choose. The author further argues that NFC places greater responsibility of revenue collection on the Federal government, thereby making the tax machinery efficient and tax compliance cost effective. The Revenue sharing system may have its merits, but it is also associated with certain demerits. For example, the provinces enjoy vast discretion in the utilization of funds, but have no control over the amount of funds they receive from the centre ; the federal government cannot influence the provinces to set priorities for achieving uniform standards in reas like health and Education; the provinces receive the funds without any strings attached to it , therefore, they feel less accountable while spending the funds; the share received by the provinces have no relation with the expenditures they incur, as usually the expenditures outgrow the rate at which the Federal revenue grows. Nighat Bilgrami and Mahpara Sadaqat (2006) have given an account of evolution and working of NFC Award ever since i ts introduction in 1951. According to the authors, with the exception of 1974 Award, there is a growing tendency in increase of revenue transfer to the provinces. The major step forward in this direction was the 1991 NFC Award, wherein new taxes were included in the divisible pool. In addition, as envisaged in Article 161 of the Constitution, royalty on crude oil and surcharge on gas were also transferred to the provinces. This caused greater decentralization of funds, which over a period of time played a pivotal role in improving service delivery in health, education and irrigation etc sectors. The paper identifies various forms of fund transfers from the Federal government to the provinces. These include Revenue Sharing Transfers, Straight transfers, Recurring Grants, Development Grants and loans. The authors have also elucidated that how resources are transferred in Pakistan from the federal government to the provinces in four ways: from the centre to the provinces, from provincial to local governments, from the federal government to the local governments and from local to local governments. The paper also gives a rationale for transfers of resources from the federal to provincial and municipal governments. At the end of the paper, the authors have suggested that smaller provinces be provided with soft loans and factors like backwardness and poverty be also considered while allocating the resources. Moreover, the provinces should be allowed to generate revenues that fall within their domain. Iftikhar Ahmed, Usman Mustafa and Mahmood Khalid (2007) have dilated upon the evolution of resource distribution over time. According to them the divisible pool has been expanded by the inclusion of more taxes. However, as population is the sole criteria for the distribution of resources through NFC awards, it has given birth to serious differences among the provinces. The paper says that resources are transferred from the centre to the provinces in two ways: Systematic or Formula Based transfer, comprising of revenue sharing and Random transfer, including grants, executive discretionary funds and Parliamentarian funds etc. According to the authors, with the passage of time the federal government has become more centralized, thereby adversely affecting the efficiency of the provincial governments. The federal government has got engaged in activities that purely fall within the purview of provinces. These include irrigation, roads, culture, tourism, youth affairs etc. This has increased the burden on federal government. The Federal government collects 93 % of the revenue but expends only 72%, whereas the provinces generate just 7% but spend 28%. The argument behind greater revenue collection by the centre is that it is more efficient in revenue collection than the provinces. But this argument is flawed as the provincial and local governments are left with lesser opportunities to collect revenue. This results in the dependency of the provinces on the federal government for transfer of resources. In this paper, NFC Award has also been criticized in that the criteria for resource distribution are mainly population. Elsewhere in the world, other factors like backwardness, population density, and revenue generation are also considered while devising a formula for distribution of resources. According to the authors, the major shift towards fiscal decentralization appeared in the 1996 NFC Award, whereby all duties and taxes were included in the divisible pool. By so doing transparency and predictability in resource distribution was though enhanced, yet the resource distribution formula between the federal and provincial governments changed little. The paper says that resources distribution has never been taken seriously. Only one criterion, that is population, has been followed for resource distribution, that’s why the NFC Award has failed to resolve the problem of Fiscal Decentralization. Usman Mustafa (2011) has highlighted the importance of federal form of government and has argued that even European Union has the characteristics of federalism. While referring to works of notable authors on the subject, it has been argued that Fiscal Decentralization increases efficiency, transparency and accountability. According to the author, in Pakistan’s case, there are pre-federalism (from 1947-71) and post federalism (from 1973 onwards) periods. In the first perid, the authority was centralized (one unit), whereas the second period is characterized by the march towards decentralization of powers from the centre to the provinces. In this context, the author argues that NFC Award is a step forward towards decentralization. He, however, criticizes population being suitable criteria for resource distribution between the centre and the provinces. In order to remove the grievances of the smaller provinces, a historical decision was taken in the 7th NFC Award on Dec, 2009 at Gawadar, to which all the provinces agreed. In this award, the demands of the smaller provinces were accepted, and a multifactor formula was devised. In the formula, factors like poverty, underdevelopment and inverse population density were also included for resource distribution. Moreover, the Federation sacrificed more that 10% of its share in favour of the provinces. It was also agreed that collection charges received by the Federal government on revenue would be curtailed from the existing 5% to 1%. This will increase the volume of net transfer of revenue from the federal to the provincial governments. All these decisions taken in the 7th NFC Award will contribute favourably towards Fiscal Decentralization in Pakistan. According to Kardar (2006), local governments have significance both in the context of Devolution plan and failure of central and provincial governments to deliver quality services to the masses ever since the emergence of Pakistan. He further argued that though legislation on devolution is a landmark achievement, the biggest challenge is to settle the row over powers between the provinces and district governments. Dr. Shahnawaz Malik, Mahmood-ul-Hassan and Shahzad Hussein analyzed the relationship between Fiscal decentralization and economic growth for the period 1971-2005. They obtained mixed results on the basis of different variables used in analysis. The study further showed that with the continuous rise in the share of provincial government revenues and expenditures, economic growth slows down. Naeem-ur-Rehman Khattak, Iftikhar Ahmed and Jangraiz Khan, while using time series data, for the period 1980 to 2007, analyzed the resource distribution, and studied the impact of financial decentralization on the economic growth of Pakistan. According to them, the divisible pool has expanded over the years by the inclusion of more taxes in it. They pointed out that the resource distribution mechanism failed to affect economic growth positively, and suggested that the distribution formula be revisited, having regard to factors like tax collection and backwardness of the provinces. They further suggested that more powers be delegated to the provinces to raise their own revenues. Chapter 3 THEORETICAL BACKGROUND AND ECONMETRIC METHODOLOGY 3. 1 Introduction In this chapter we discuss the theory which guides our research, variables of our model, type of statistical relationship and the model we will use for estimation. 3. 2 THEORETICAL BACKGROUND Various forms of Decentralization. It refers to the delegation of powers and functions from the central to low-level governments. There are three main forms of decentralization (JICA 2008): . 2. 1. Decentralization It is the weakest type of decentralization, and refers to the transfer of decision making powers along with financial and management responsibilities from the officials in the centre to those serving in the local /regional offices. 3. 2. 2. Delegation Here the powers are delegated to the autonomous bodies, including corporations, housing authorities’ etc. , working under the supervision of the central go vernment. These organizations enjoy vast discretion and decision making powers. 3. 2. 3. Devolution It is the gradual transfer of administrative, financial and political authority to the local bodies, which exercise their powers and functions within certain geographical confines. It has three main constituents, as discussed below: a) Political decentralization It refers to the shifting of powers and authority to local bodies, run by local political representatives. It has a well-established system of political decision-making and accountability at the local level. b) Administrative decentralization It is the form of devolution whereby staff of line ministry is dissociated from their corresponding ministries and brought under the control of the local administration. This is done through establishing local pay roll, which empowers them to reward and punish the staff. c) Fiscal decentralization It refers to the shifting of authority and responsibility to the sub-level governments with regard to decision-making on distribution of financial resources. This also includes the powers to raise local revenue. Fiscal decentralization has attracted great attention, among the economic circles, especially for improving service delivery at the local level. The main objectives of Fiscal decentralization include efficient utilization of resources, effective service delivery, macroeconomic stability and economic growth. With these objectives in view, the developing world is following the principle of Subsidiarity, which emphasizes that authority should rest with the lower tiers of government for effective use, and that the responsibility of incurring expenditures should match with adequate financing. Decentralization leads to efficient utilization of funds through improvement in governance, as lower strata of government can better assess people’s problems and know their priorities. Decentralization enhances participation of local population as the beneficiaries are directly involved in planning the allocation of funds. Increased decentralization gives birth to democratization, which keeps the government close to the masses, thereby making it more accountable. 3. 3 Various theories regarding decentralization The above narrated advantages, and many more not discussed here, emphasize the importance of Fiscal decentralization. But it was since the publishing of Tiebout’s article, â€Å"A pure theory of local Expenditure† that this concept has gained great popularity among the theorists, and the volume of literature on this topic has increased tremendously. According to Tibeout (1956), Fiscal decentralization improves production efficiency through greater mass mobilization. In 1959 Musgrave pointed out that the role of government is to bring stability to the market and effect the redistribution of income. He further argued that efficient utilization of resources can be secured only when local tastes and choices are taken into consideration. Oates (1972) pointed out that people living in different localities have peculiar tastes and preferences for public service, therefore, local governments, as against central government, being better informed, will provide better services to its citizens. This concept is called Oates â€Å"Decentralization Theorem†, according to which economic efficiency can be enhanced by decentralizing the availability of public goods and services. Thus, the central government should be responsible for devising a national policy and providing efficient levels of government for distribution of goods . (Oates,2005) So, equipped with the requisite paraphernalia , the sub-national governments are in a better position to put in place welfare-maximizing policies. Cremer, Estach and Seebright (1994), stated that government at the centre cannot reach the information about local tastes and choices. Thus, it is through Fiscal Decentralization that local agents can bring about efficient supply of goods and services to their constituencies. Almost identical views were expressed by Qian and Weingast (1997), who opined that decentralization puts a check on budget expansion by promoting competition and strengthening accountability, which effects supply of goods and services in an efficient manner. Having said this, there is always a tendency among the local political agents to enlarge the scope of public goods and services at the cost of other jurisdictions. Rodden (2003) attributed this predilection to the type of decentralization being followed. If decentralization is dependent on self-generated tax revenue, smaller governments emerge; and if transfer of funds occurs from the centre, it results in budget expansion. Though from economic and political point of view there are many benefits of Fiscal decentralization, yet it is not a cure for all ills. For instance, Fiscal Decentralization entails loss of Economies of Scale and loosens control over scarce resources. From it follows that centralization and Decentralization are not alternatives, rather the countries should find a balance between the two as per their requirements. . 4. Rationale for Fiscal Transfer in Pakistan The first reason is the general perception that the federal government is better equipped to collect major taxes, but is inefficient to collect smaller taxes. Also, the federal government may undertake major projects, but fail to deliver on smaller projects. Hence, the efficiency criteria must be followed while deciding allocation of means and responsibilitie s. The second reason for resource transfer from the centre to the provinces is that the latter lack the resources to finance the provision of even basic services. In the last ten years, the average revenue generated by the centre, provinces and municipalities stand at 89%, 5% and 6% respectively. As against the revenue generation, the share in recurring expenditure of the federal, provincial and municipal governments is 74%, 23% and 4% respectively. As regards developmental expenditure, the share of these governments is as follows: Federal government 65%, provincial government 25% and municipal governments 6%. These figures indicate that the provinces have limited resources vis-a-vis the amount of expenditure they incur. This necessitates the transfer of resources from federal to lower-tiers of government. Another reason that can be attributed to the allocation of resources among the different levels of government is Adequacy of Revenue. This concept refers to the capability of government not only to generate the initial revenue required to start a project but also to its ability to sustain it. In Pakistan’s case, Adequacy of revenue does not exist; hence transfer of resources to the lower tiers of government is necessary if they are to undertake any such projects. The fourth reason of transfer funds from the centre to the provinces is that there are taxes which though provincial in nature but is collected by the federal government, for example Sales Tax. Another rationale for transfer of funds is that federal government uses certain taxes for the overall stabilization of the economy; hence they should be under the control of the federal government. [NFC AWARDS Commentary and Agenda, Nighat Bilagarami, Jaffery and Mahpara Sadaqat (2006)]. 3. 5 ECONMETRIC METHODOLOGY 3. 5. 1Augmented Dicky Fuller (ADF) Test In this study a time series data is being used. Since this kind of data is usually non-stationary in nature, we first test it for stationarity or non-stationarity. For this purpose, an enhanced version of Dicky fuller Test, known as Augmented Dicky Fuller Test, is being employed. The ADF includes extra lagged terms of the dependant variable so as to remove auto-correlation. The following equations denote the three possible forms of ADF Test. i) Without any constant and trend ?yt=? *yt-1+i=1p? i? yt-i+et ii) Constant with non trend ?yt=a+? *yt-1i=1p? i+? yt-1+et iii) Constant with trend ?yt=a+? t+? *yt-1+i=1p? i+? yt-1+et Of the above equations, (iii) represents a more generalized form of ADF Test. Mackinnon(1991) gave critical values for the DF test The critical values for the ADF Test are the same as those for Dickey Fuller Test. If the DF Statistical value is smaller than the critical value, Null hypothesis of a unit root is rejected, which suggests that the yt is stationary process or the variables are stationary. If on running the ADF Test the variables are found non-stationary in their original levels of series, the variables are made stationary in their first difference level of the series. . 5. 2 Ordinary least square model (OLS) Once the variables are made stationary, estimation is made by employing Ordinary least square model (OLS). This model is suitable for ascertaining linear interdependencies in a time series data. Here it is also worthwhile to discuss Regression model. A multiple linear regression model estimates value of dependant variable (also called response variable) on the basis o f independent variables (also called explanatory variables). But there is always a difference in estimated and observed values. Therefore, a Regression model also possess unexplained variable, also called error term, which measures the difference between observed and estimated values. y= b+b1 x1+ b2 x2+ b x3 †¦Ã¢â‚¬ ¦ +ei A regression model will be â€Å"best fit† if the difference between observed and estimated value is minimum. We cannot take error term by simply adding all the difference between observed and estimated value because it may contain both positive and negative values which can cancel the effect of each other. So, we take the square of error terms which leads us to OLS . i. e. minimum squared difference. OLS is useful for structural inference and policy analysis. For the purpose of Structural Analysis of data, certain assumptions regarding the causality of data are made. These are : error term (i) is normally distributed (ii) has zero expected value of mean (iii) has constant variance in each time period and for all values of X and (iv) its value in one time period is unrelated to its value in another time period. OLS is a very simple technique by which we can calculate the coefficient of each variable in other words it gives us the impact of one variable on another variable, which is summarized by impulse response function. | | | | | Chapter 4 DATA AND VARIABLE 4. 1 INTRODUCTION This chapter covers how data is collected, what are sources of our data and how variables have been constructed variables for our estimation. 4. 2 Data type For the purpose of studying the relationship between Fiscal decentralization and economic growth, secondary data is being utilized. 4. 3 Sources of data For the purpose of this study the following sources have been utilized. i) Issues of â€Å"Economic survey of Pakistan† ii)World Development Indicators iii)Ten years in Pakistan Statistics† (1983) iv)UNDP Human Development Report, 2007. )Hand book of Statistics on Pakistan Economy (2005)† 4. 4 Construction of variables Economic growth of the country is taken as dependant variable. It is measured in terms of per capita Log of per capita gross domestic product (LYP), which is rebased by the year 2000 market prices. The variable is expressed in real terms using GDP deflator to ascertain the pattern of economic growth over the years. The Fiscal decentralization is captured on the ratio of Provincial share in Total Revenue to the Total Revenue (PRFR). The data source for these variables is â€Å"Economic survey of Pakistan and covers the period from 1964 to 2008. As regards investment, it is captured by the Gross Fixed Capital Formation (GFCF) and data is taken from â€Å"Pakistan Economic Survey† Moreover, a variable for trade openness (OPN) is also used in the estimation model. This variable is obtained by adding imports and exports and dividing the same by LYP (at market prices). Here, too, the source of data is â€Å"Economic Survey of Pakistan† Other variables in the estimation model are Tax to GDP ratio (TGDP) and GINI co-efficient, the latter being used to calculate income equality and its source is UNDP Human Development Report. Chapter 5 RESULTS AND DISCUSSION . 1 INTRODUCTION The section consists of results and their interpretation. In para 5. 1, 5. 2 and 5. 3 Stationarity of data, Autocorrelation and the results of OLS model respectively have been discussed. 5. 2 Unit Root test In a time series data, the major problem is the non-stationarity of variables. So, before estimation, a test is applied to make the variables stationary. For this purpose various tests can be employed, but in our case we have used Augmented Dickey Fuller test, the results of which are shown in table 5. 1 below. Table 5. 1 UNIT ROOT TEST| Non stationary variables| ADF-value| 5% Critical value| Gfcf| -1. 693492| -2. 9303| Gini| -2. 462911| -2. 9303| Lpy| 0. 863730| -2. 9303| PRFR| -2. 206432| -2. 9303| TGDP| 0. 158213| -2. 9303| Stationary variables| | ADF-value| Critical value| Gfcf| -3. 997577| -2. 9320| Gini| -4. 766215| -2. 9320| Lpy| -4. 632922| -2. 9320| OPN| -3. 453532| -2. 9303| PRFR| -3. 662186| -2. 9320| TGDP| -3. 01612| -2. 9320| Gfcf- Gross fixed capital formation, Gini- Income inequality, Lpy- Log of GDP, OPN- Openness to trade (export+import/GDP), PRFR- Ratio of provincial shares in total revenue to total revenue, TGDP- Tax to GDP ratio. At the level, all the variables except â€Å"OPN† were found non-stationary, and were, therefore, stationarized at First difference level by using ADF Test. 5 . 3 TEST FOR AUTOCORRELATION Autocorrelation tells about the relationship between two or more error terms in the model. For unbiased estimation, autocorrelation must be zero. If there exists problem of autocorrelation, it has to be removed. For this purpose, two hypothesis are constructed : one, H0: Co-Var(u,u+1)=0,there is no autocorrelation between the error terms and second, Ha: Co-Var(u,u+1)not equal to zero, meaning there is a problem of autocorrelation. To check autocorrelation in our model, we have used Breusch-Godfrey Serial Correlation LM Test (BG TEST), as shown in table 5. 2. According to the table, probability of F-statistic is significant at 5%, so we reject the hypothesis that cov (ut, ut+1) is equal to zero. In other words, there is autocorrelation problem in our model. In order to remove the autocorrelation problem, we have applied ARMA model with autocorrelation through AR (1), AR (3) and MA (2). Breusch-Godfrey Serial Correlation LM Test:| F-statistic| 4. 781666| Probability| 0. 001241| Obs*R-squared| 20. 50376| Probability| 0. 002252| Probability of F-statistic is significant at 5%, so we reject the hypothesis that cov (ut, ut+1) is equal to zero. It means there is autocorrelation problem in our model. 5 . 4 ESTIMATION The results of the estimation with OLS are tabulated in Table 5. 3 below: Dependent variable:LPYMethod: Least Squares| Date: 03/25/12 Time: 11:13| | | | | | Variable| Coefficient| t-Statistic| Prob. | | GFCF| 0. 004693| 3. 806074| 0. 0006| | GINI| -0. 324275| -2. 919698| 0. 0065| | OPN| 0. 000254| 0. 468847| 0. 6425| | PRFR| -0. 000173| -0. 517278| 0. 6086| | TGDP| -0. 003194| -0. 809929| 0. 4242| | | | | | | R-squared| 0. 97793| Prob(F-statistic)| 0. 000000| Adjusted R-squared| 0. 997081| | | Durbin-Watson stat| 1. 705104| | | | | | | In the model ‘’R^2’’ shows strength of the regression line, which means how much important variables are covered by a model or how well variation in independent variables explains the variation in dependent variable. For time series analysis â€Å"R^2’’ value must be greater than 0. 70 or 70%, which means the model must explain at least 70% of the total variation in dependent variable. In our results, â€Å"R^2=99%† value is greater than 70%, so 99% of variation LPY is explained by our variables i. . GFCF, GINI, OPN, PRFR, TGDP. But the values in the 3rd column against each variable show â€Å"t† values. If the t value, in absolute form, is greater than â€Å"2†, the relationship between the variables is significant. In our case, the financial autonomy is measured in terms of â€Å"Ratio of Provincial share in Total Revenue (PRFR)†, whereas the Economic growth is captured on the variable LPY. It is evident from the table that the relationship between LPY (dependent) and PRFR (independent) is insignificant because the â€Å"devalues, in absolute form, are less than â€Å"2†. It implies that LPY is not influenced by PRFR. In other words, in Pakistan’s case, Fiscal decentralization has no bearing on economic growth. The model shows that GFCF and GINI with variables have ‘’t’’ value greater than 2 in absolute form affect economic growth. Durbin-watson value in the table tells us about the problem of auto-correlation in the model. If the value of Durbin-watson test is between 1. 7 and 2. 2 there will be no auto-correlation. In our table its value 1. 7, so we say that the problem of auto-correlation has been removed. CHAPTER NO: 06 CONCLUSION This study focuses on identifying the impact of fiscal decentralization on economic growth through compilation of its historical trends. It is generally believed that that proper information about the existing fiscal decentralization system will lead to better policy formulation, which will ultimately put the country on the road to prosperity. In this regard, it is also worthwhile to analyze the implications of the current fiscal decentralization policy on the economic growth of the country. Thus, this study helps ascertain the extent of financial autonomy of the provinces and measures its long term benefits. In this study secondary data has been used, which covers the period from 1964 to 2008. Provincial share in total revenue (PRFR), GFCF- Gross fixed capital formation, Gini- Income inequality, OPN- Openness to trade (export+import/GDP), PRFR- Ratio of provincial shares in total revenue to total revenue, TGDP- Tax to GDP ratio are dependant variables, whereas LPY (Log of GDP) is dependent variable in the data. We used OLS model for our estimation, the results of which revealed that only GFCF and GINI have significant impact on GDP growth. On the other hand the influence of, OPN, TGDP and PRFR on economic growth (LPY) are insignificant. As PRFR and LPY measure the extent of fiscal decentralization and Economic growth respectively, we conclude that economic growth in Pakistan does not depend on fiscal decentralization. This may be due to the fact the Resource Distribution Formula has been mainly based on population. The results of other factors, included of late in the NFC Award, are yet to be seen. It is, therefore, proposed that not only the impact of population in the distribution formula be diluted by the inclusion of other factors, being emphasized by the smaller provinces, but also the powers of the provinces with regard to revenue generation be enhanced. ——————————————– [ 1 ]. The words, Financial devolution, financial autonomy and Financial /fiscal decentralization are being used interchangeably in this study. [ 2 ]. In this discussion ,the words, federating unit, unit, province, sub-national government and low-level government will be used interchangeably. 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