Does Fiscal Decentralization Improve Healthcare Outcomes? Empirical Evidence from China

Abstract

Since the late 1970s, China has adopted a variety of economic reforms that have led to its overall economic success. The Tax Sharing System (TSS) reform, as part of the gradual fiscal decentralization policy, was initiated in 1994. The conventional theory claims that fiscal decentralization could result in various potential benefits including increased responsiveness of local governments to deliver public goods. However, very little empirical work has examined the impact of fiscal decentralization on health outcomes in China. In this study, we use the infant mortality rate (IMR) as an indicator of healthcare outcomes and provide a quantitative measurement of the impact of fiscal decentralization on infant mortality at the provincial government level. We measure fiscal decentralization as both a dummy and a ratio and estimate the infant mortality rate production function using both Ordinary Least Squares (OLS) and Panel Feasible Generalized Least Squares (FGLS) approaches. We find that, contradictory to the predictions made by the conventional theories, fiscal decentralization has generated an overall adverse impact on the IMR in China.