2012 Volume 42 Issue 4 Pages 937-946
We investigated the effects of fiscal decentralization on economic growth in three prefectures in the Tokai region of Japan. A six-period overlapping generations model with endogenous growth fueled by human capital accumulations was employed and differences in economic growth in the prefectures were examined. Higher GDP levels may be attributed to higher levels of human resources in these prefectures where educational expenditures are higher than the average. Actual prefectural data were applied into the model to describe the economy as realistically as possible. Models that enable the capture of regional differences are underdeveloped. Although our model depends on various assumptions, it is nevertheless useful for examining divergence for local policy implications among prefectures. Our main finding was that regardless of the amount of public education expenditure, Mie may achieve an 18.3% growth rate during the next ten years (cf. 15.8% for Aichi; 7.5% for Gifu). This is because the public debt was only 880,000 yen during the period under the decentralized system (cf. 1,457,000 yen for Aichi; 1,029,000 yen for Gifu). This suggests that decentralized governments require not only a positive educational policy reform but a balanced budget amendment for economic growth.
JEL Classification: C68, D91, E62, H62, H72
