2022-06-02-IMF-Fiscal_Decentralization_Improves_Social_Outcomes_When_Countries_Have_Good_Governance_29页_2mb

Fiscal Decentralization and Social Outcomes

Fiscal decentralization can improve health and educational outcomes, but its benefits are contingent on strong governance. This paper uses panel instrumental variable Tobit analysis on cross-country data from 1996-2018 to examine the relationship between fiscal decentralization and social outcomes, with governance as a key factor.

Key findings:

• Fiscal decentralization of health spending to local governments can lower infant mortality and improve life expectancy when governance is high. However, without good governance, it may worsen outcomes.
• Education expenditure decentralization to subnational governments enhances PISA scores more than to local ones, due to economies of scale.
• Governance quality must exceed a threshold for decentralization to yield positive effects. Strong government effectiveness and control of corruption are crucial.
• Sequencing is important: countries should improve governance before advancing fiscal decentralization to maximize benefits.
• Medical infrastructure (e.g., hospital beds, physicians) complements decentralization in improving health outcomes.

Simulations show:

• Marginal effects of governance are larger for countries with low governance levels, and decentralization benefits increase with higher governance quality.
• Life expectancy and infant mortality improvements are more pronounced with local decentralization, while education gains favor subnational levels.

Policy implications:

• Focus on strengthening governance, reducing corruption, and enhancing accountability in public service delivery.
• Prioritize health and education spending in decentralized systems.
• Tailor interventions based on country-level governance and institutional capacity.