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<p>This study examines the political economy of local public finance in Pakistan by analyzing how party ideology, coalition dynamics, electoral cycles, and institutional governance structures influence per capita municipal budget balances. It aims to uncover how political incentives, and institutional arrangements affect subnational fiscal behavior under decentralization. The analysis draws on an original panel dataset comprising 120 municipalities across four provinces from 2011 to 2023. To address endogeneity, measurement error, and unobserved heterogeneity, we employ the two-step system generalized method of moments (System-GMM) estimator. The empirical model incorporates dynamic political covariates and institutional controls, including a novel indicator variable about the structure of local government, i.e., distinguishing between elected councils and appointed administrators. The results reveal that municipalities governed by elected representatives exhibit significantly higher fiscal balance levels, suggesting stronger budgetary discipline is linked to democratic accountability. Coalition power and electoral cycles also shape fiscal performance, with extended election periods associated with deteriorating budget outcomes. In contrast, ideological orientation and political fragmentation have limited direct impact. Robustness tests confirm the stability of the core findings across alternative political variable specifications. The study provides new insights into how institutional legitimacy and political structure jointly influence fiscal performance at the local level by examining the structure of local government, i.e., whether elected or administered (an underexplored area in fiscal federalism literature). The findings underscore the need to institutionalize continuous and democratic local governance. Ensuring that elected municipal bodies are empowered and protected can strengthen subnational fiscal accountability and improve public service delivery.</p>

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Political budgeting under decentralization: evidence from Pakistan’s local governments

  • 期刊论文

  • 发表日期：

    2026年1月6日

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  • Saima Sarwar,
  • Arusa Sohail

摘要

This study examines the political economy of local public finance in Pakistan by analyzing how party ideology, coalition dynamics, electoral cycles, and institutional governance structures influence per capita municipal budget balances. It aims to uncover how political incentives, and institutional arrangements affect subnational fiscal behavior under decentralization. The analysis draws on an original panel dataset comprising 120 municipalities across four provinces from 2011 to 2023. To address endogeneity, measurement error, and unobserved heterogeneity, we employ the two-step system generalized method of moments (System-GMM) estimator. The empirical model incorporates dynamic political covariates and institutional controls, including a novel indicator variable about the structure of local government, i.e., distinguishing between elected councils and appointed administrators. The results reveal that municipalities governed by elected representatives exhibit significantly higher fiscal balance levels, suggesting stronger budgetary discipline is linked to democratic accountability. Coalition power and electoral cycles also shape fiscal performance, with extended election periods associated with deteriorating budget outcomes. In contrast, ideological orientation and political fragmentation have limited direct impact. Robustness tests confirm the stability of the core findings across alternative political variable specifications. The study provides new insights into how institutional legitimacy and political structure jointly influence fiscal performance at the local level by examining the structure of local government, i.e., whether elected or administered (an underexplored area in fiscal federalism literature). The findings underscore the need to institutionalize continuous and democratic local governance. Ensuring that elected municipal bodies are empowered and protected can strengthen subnational fiscal accountability and improve public service delivery.