The Effect of Fiscal Decentralization on Sectoral Green Total Factor Productivity in Pakistan: An Empirical Evidence

Abstract

The study endeavors to measure sectoral Green Total Factor Productivity (GTFP) and the role of fiscal decentralization and key environmental regulations in affecting GTFP, for the manufacturing sector of Pakistan over the time period 1975-2019. The growth accounting method is employed to measure sectoral GTFP to examine the sector’s standing in attaining long-run environmental sustainability. Moreover, the role of fiscal decentralization and other lead determinants of GTFP is investigated by employing the Fully Modified OLS estimation technique. The study provides a highly volatile trend of sectoral green factor productivity and proved non-linearity in fiscal decentralization and sectoral GTFP relationship. The role of institutional quality also appears as positively significant for GTFP. Findings support a positive relationship between fiscal decentralization and GTFP however the link weakens and turns negative when excessive decentralization is adopted and hence, shows a trajectory of rising sectoral productivity but at decreasing rate with the pace of decentralization. National Environmental Protection Act 1997 and National Conservation Strategy 2005 have appeared significantly and positively contributing with an overwhelming effect on green factor productivity for the manufacturing sector and demands strengthening of environmental policies network along with its rigorous implementation. Moreover, a dedicated though cautious move towards fiscal decentralization is required to achieve environmental sustainability in Pakistan.