NATIONAL FINANCE COMMISSION (NFC) AND INCLUSIVE SOCIAL DEVELOPMENT: A CRITICAL REVIEW OF EFFECTIVENESS OF NFC IN THE POST 18TH AMENDMENT ERA

Abstract

This study attempts to investigate the effectiveness of the National Finance Commission (NFC) transfers in promoting comprehensive social development in Pakistan, in the wake of the 18^th Constitutional Amendment. The study uses penal data for the period of 14 years (2010 to 2023) of four provinces. The aim of the paper is to measure the impact of NFC on social development. The study employs Fully Modified Ordinary Least Squares (FMOLS) methodology to estimate long term relationships and short-term dynamics and structural shocks by employing both Fixed-Effects and Random-Effects. The results reveal that NFC transfers, to the provinces, do not significantly impact the SDI, both in short- and long-term that implies that unconditional transfers cannot cause tangible welfare improvements. Conversely, provincial health spending depicts a stronger while education expenditures have weaker but positive effect on the SDI. Moreover, structural factors, i.e. quality of governance, rate of literacy, and levels of poverty turn out to be as most important drivers of development outcomes. The study emphasizes a strong need for governance reforms and linking provincial spending with performance measures, in order to realize the dream of tangible and impactful outcomes of the fiscal decentralization on social development can be realized.