Fiscal Decentralization Improves Social Outcomes When Countries Have Good Governance

By Ryota Nakatani, Qianqian Zhang, Isaura Garcia Valdes

June 3, 2022

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Ryota Nakatani, Qianqian Zhang, and Isaura Garcia Valdes. Fiscal Decentralization Improves Social Outcomes When Countries Have Good Governance, (USA: International Monetary Fund, 2022) accessed December 3, 2024

Disclaimer: 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.

Summary

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.

Subject: Corruption, Crime, Education, Expenditure, Fiscal federalism, Fiscal policy, Health, Health care spending

Keywords: Corruption, Decentralization matter, Education, Education expenditure decentralization, Fiscal Decentralization, Fiscal federalism, Global, Governance, Governance Indicator, Government effectiveness, Health, Health care spending, Health outcome, Subnational government

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2022/111
Stock No:

WPIEA2022111
ISBN:

9798400211768
ISSN:

1018-5941

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