Modeling method of local financial dependence: Evidence from Mongolia

Area of Science:

• Public Finance
• Decentralization Studies
• Mongolian Economic Policy

Background:

• Sub-national governments often face financial disparities with central governments.
• Political interference can complicate efforts to balance finances.
• Understanding local financial dependence is crucial for effective fiscal federalism.

Purpose of the Study:

• To summarize the theory of local financial federalism.
• To propose a novel model for identifying factors influencing local financial dependence.
• To analyze these factors using data from Mongolia.

Main Methods:

• Development of a theoretical framework with five assumptions.
• Application of panel regression analysis.
• Econometric testing of nine variables using Mongolian provincial data (2013-2022).

Main Results:

• Local budget investment, personal income tax, property tax, and other local taxes were found to decrease local financial dependence.
• Increased local budget expenditures correlate with higher local financial dependence.
• Higher Gross Domestic Product (GDP) also showed a positive association with increased local financial dependence.

Conclusions:

• The proposed model effectively identifies key drivers of local financial dependence.
• Fiscal policy interventions focusing on local revenue generation can enhance sub-national financial autonomy.
• Economic growth, while desirable, requires careful management to avoid exacerbating central-local fiscal imbalances.