Decentralization and rural–urban income inequality: implications for inverted-U hypothesis of Pakistan

The decentralization process greatly improves a society's welfare by offering public goods and services. Inequality between rural and urban areas as well as the overall effects of decentralization is examined in this study in Pakistan. In addition, the rural–urban inverted-U hypothesis is investigated for a country-specific focus on Pakistan using a time-series data set spanning the years 1985 to 2020. Using the auto-regressive distributive lag model (ARDL) bounds testing co-integration method, variables are evaluated over the long run and their error correction dynamic is applied to short-run instants of the variables. The study's findings successfully demonstrate the opposite of what is typically found for the implications of rural inequality owing to fiscal decentralization, namely that fiscal decentralization has exacerbated the overall inequality situation in rural and urban Pakistan. Decentralization in politics and administration is more beneficial for enhancing the overall and urban income distribution in Pakistan. Decentralization has, however, affected rural regions' income distribution in both directions. Furthermore, for both the national economy and urban regions, the GDP per capita growth rate and its square support Kuznet's inverted U-shape theory. However, the distribution of income in Pakistan's rural areas does not support this theory.