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Fiscal Decentralization Improves Social Outcomes When Countries Have Good Governance
Author:
Ryota Nakatani
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,
Qianqian Zhang
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, and
Isaura Garcia Valdes
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Series:
IMF Working Papers
Volume/Issue:
Volume 2022: Issue 111
Language:
English
Publication Date:
03 Jun 2022
DOI:
https://doi.org/10.5089/9798400211768.001
ISBN:
9798400211768
ISSN:
1018-5941
Pages:
29
Keywords:
Fiscal Decentralization; Governance; Corruption; Health; Education; education expenditure decentralization; government effectiveness; decentralization matter; Subnational government; health outcome; governance Indicator; Fiscal federalism; Health care spending; Global
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Does fiscal decentralization improve health and educational outcomes? Does this improvement depend on the quality of governance? How do fiscal decentralization and governance interact? We answer these questions through an instrumental variable Tobit analysis of cross-country panel data. We find negative effects of fiscal decentralization on health outcomes, which however are more than offset by better governance. Education expenditure decentralization to subnational governments enhances educational outcomes. We conclude that countries can only reap the benefits from decentralization when the quality of their governance arrangements exceeds a certain threshold. We also find that sequencing and staging of decentralization matter. Countries should improve government effectiveness and control of corruption first to maximize benefits of fiscal decentralization.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2022: Issue 111