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© 2022 International Monetary Fund
WP/22/111
IMF Working Paper
Fiscal Affairs Department
Fiscal Decentralization Improves Social Outcomes When Countries Have Good Governance Prepared by Ryota Nakatani, Qianqian Zhang, and Isaura Garcia Valdes*
Authorized for distribution by Nikolay Gueorguiev June 2022
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: 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.
RECOMMENDED CITATION: Nakatani, R., Zhang, Q., and Garcia Valdes, I., 2022, “Fiscal Decentralization Improves Social Outcomes When Countries Have Good Governance” IMF Working Papers 22/111 (Washington D.C.: International Monetary Fund).
| JEL Classification Numbers: | D73; H75; H77; I18; R50 |
| Keywords: | Fiscal Decentralization; Governance; Corruption; Health; Education |
| Author’s E-Mail Address: | RNakatani@imf.org, QZhang@imf.org, IGarciaValdes@imf.org |
| JEL Classification Numbers: | D73; H75; H77; I18; R50 |
| Keywords: | Fiscal Decentralization; Governance; Corruption; Health; Education |
| Author’s E-Mail Address: | RNakatani@imf.org, QZhang@imf.org, IGarciaValdes@imf.org |
Title Page
WORKING PAPERS
Fiscal Decentralization Improves Social Outcomes When Countries Have Good Governance
Prepared by Ryota Nakatani, Qianqian Zhang, and Isaura Garcia Valdes
Contents
Introduction
Empirical Method
Results
Conclusion
Annex I. Data Source and Description
References
Figures
1. Triangular Relationship among Fiscal Decentralization, Governance, and Social Outcomes
2. Marginal Effects on Infant Mortality Rate
3. Marginal Effects on Life Expectancy
4. Marginal Effects on PISA Score
5. Flowchart of Policy Actions
6. Effects of Medical Supplies
7. Effects of Hospital Beds on Infant Mortality Rates
8. Demographic Aging and Numbers of Physicians
Tables
1. Results for Infant Mortality Rate, Local Governments
2. Results for Life Expectancy, Local Governments
3. Results for Infant Mortality Rate, Subnational Governments
4. Results for Life Expectancy, Subnational Governments
5. Results for PISA Score, Local Governments
6. Results for PISA Score, Subnational Governments
The authors appreciate helpful comments from Vitor Gaspar, Nikolay Gueorguiev, Jiro Honda, Kenji Moriyama, Gemma Preston, Alberto Tumino, and other participants in the Fiscal Affairs Department Seminar and the Fiscal Operations Division 1 Seminar held at the IMF.