Abstract: Fiscal equalization is an important mechanism for balancing the autonomy of local government on function execution with a need for centralized fiscal management. To evaluate the relationship between fiscal decentralization, represented by the Fiscal Decentralization Index (FDI), and indicators that influence local autonomy the study used empirical techniques. Based on the econometric results of the Albanian case, the impact on FDI is described by factors such as vertical and horizontal equalization, conditional funds for delegated functions, and central government investments in local government. The paper's findings indicate the importance of the fiscal equalization mechanism in improving the local government autonomy indicators. Statistically, horizontal and vertical equalization have adverse effects on the Fiscal Decentralization Index. Vertical equalization policies show a significant positive impact on FDI results, suggesting that increasing vertical equalization will strengthen local autonomy. Conversely, the influence of horizontal equalization appears to be less pronounced, indicating that its impact on local autonomy may be more complex and context-dependent. By using conditional funds for delegated function, the study argues a mixed effect on local autonomy, based on the specific legal conditions on the independence of using those funds. Additionally, investments from central institutions demonstrate a varying degree of influence on the FDI, reflecting the diverse ways in which central-level investments can either enhance or constrain local autonomy. By empirically analyzing these relationships over five years for every local government unit of Albania and the theoretical (legal) treatment of fiscal equalization, this study contributes to a deeper understanding of the political decisions that can create dynamics between fiscal equalization and local autonomy. Well-designed fiscal equalization systems are essential for balancing the autonomy benefits of decentralization to achieve equitable access to public services across regions. The insights gained from this research can inform policymakers in designing more effective fiscal decentralization strategies that strike an optimal balance between central coordination and local empowerment.

Keywords: Equalization, Local Autonomy, Public Finance, Decentralization index, Local Government, Central Government

Pages: 1227-1236